As filed with the Securities and Exchange Commission on August 5, 1998
Registration No. 333-60247
333-60247-01
333-60247-02
333-60247-03
333-60247-04
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
___________________
COYNE INTERNATIONAL ENTERPRISES CORP.
BLUE RIDGE TEXTILE MANUFACTURING, INC.
CLEAN TOWEL SERVICE, INC.
OHIO GARMENT RENTAL, INC.
MIDWAY-CTS BUFFALO, LTD.
(Exact name of registrants as specified in their charter)
NEW YORK 7210 16-6040758
GEORGIA 7210 58-2018333
GEORGIA 7210 58-1205265
OHIO 7210 34-1261376
NEW YORK 7210 16-1469155
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(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification no.)
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140 CORTLAND AVENUE
SYRACUSE, NY 13221
(315) 475-1626
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
____________________
THOMAS M. COYNE
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
COYNE INTERNATIONAL ENTERPRISES CORP.
140 CORTLAND AVENUE
SYRACUSE, NY 13221
TELEPHONE: (315) 475-1626
FACSIMILE: (315) 475-9978
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_____________________
Copy to:
FRANCIS E. DEHEL, ESQUIRE
BLANK ROME COMISKY & MCCAULEY LLP
ONE LOGAN SQUARE
PHILADELPHIA, PENNSYLVANIA 19103
TELEPHONE: (215) 569-5500
FACSIMILE: (215) 569-5555
_____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b)under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
TITLE OF AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------------
11 1/4% Series B Senior
Subordinated Notes due 2008 $75,000,000 $1,000 $75,000,000 $22,125(3)
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Guarantees of 11 1/4%
Series B Senior $75,000,000 (2) (2) None
Subordinated Notes due 2008
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(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(f).
(2) No further fee is payable pursuant to Rule 457(n).
(3) Such fee was previously paid by the Registrant on July 30, 1998
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 5, 1998
PROSPECTUS
COYNE INTERNATIONAL ENTERPRISES CORP.
OFFER TO EXCHANGE ITS 11 1/4% SERIES B SENIOR SUBORDINATED NOTES DUE 2008,WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING 11 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2008.
The Exchange Offer will expire at 5:00 p.m., New York City time, on ,
1998, unless extended.
-----------
Coyne International Enterprises Corp. d/b/a/ Coyne Textile Services ("CTS" or
the "Company"), a New York corporation, hereby offers (the "Exchange Offer"),
upon the terms and conditions set forth in this Prospectus (the "'Prospectus")
and the accompanying Letter of Transmittal (the "'Letter of Transmittal"), to
exchange $1,000 principal amount of its 11 1/4% Senior Subordinated Notes due
2008 (the "'Exchange Notes"'), which will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 11 1/4% Series A Senior Subordinated Notes
due 2008 (the "'Initial Notes"), of which $75,000,000 principal amount is
outstanding. The Exchange Notes and the Initial Notes are each sometimes
referred to herein as the "'Notes." The form and terms of the Exchange Notes
are the same as the form and terms of the Initial Notes (which they replace),
except that the Exchange Notes (i) will bear a Series B designation and a
different CUSIP number from the Initial Notes, (ii) will have been registered
under the Securities Act and, therefore, will not bear legends restricting
their transfer and (iii) will no longer be entitled to certain rights under the
Registration Rights Agreement (as defined herein). The Exchange Notes evidence
the same debt as the Initial Notes and will be issued under and be entitled to
the benefits of the Indenture, dated as of June 26, 1998 (the "Indenture"),
between the Company, the Guarantors (as defined herein) and IBJ Schroder Bank &
Trust Company, as trustee (the "Trustee"), which also governs the Initial
Notes. See "Exchange Offer."
The Exchange Notes will be general unsecured obligations of the Company, will
rank subordinate in right of payment to all Senior Debt (as defined herein) and
will rank senior or pari passu in right of payment to all existing and future
subordinated indebtedness of the Company. The Exchange Notes will be
unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
subordinated basis by all of the Company's current and future Domestic
Subsidiaries (as defined herein) other than Receivables Subsidiaries (as
defined herein) (the "Guarantors"). The Subsidiary Guarantees will be general
unsecured obligations of the Guarantors, will rank subordinate in right of
payment to all Senior Debt of the Guarantors and will rank senior or pari passu
in right of payment to all existing and future subordinated indebtedness of the
Guarantors. As of April 30, 1998, on an as adjusted basis, the Company and its
subsidiaries had approximately $10.6 million of Senior Debt outstanding.
The Notes mature on June 1, 2008, unless previously redeemed. Interest on the
Notes is payable semiannually on June 1 and December 1, commencing December 1,
1998. The Notes will be redeemable at the option of the Company, in whole or in
part, on or after June 1, 2003, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon and Liquidated Damages (as defined herein),
if any, to the redemption date. Upon a Change of Control (as defined herein),
the Company will be required to make an offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus accrued and unpaid interest
thereon and Liquidated Damages, if any, to the date of repurchase. (Cover
continued on following page.)
-----------
See "RISK FACTORS" BEGINNING ON PAGE 19 HEREIN FOR A DESCRIPTION OF CERTAIN
RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR INITIAL NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSIONER OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
The Company will accept for exchange any and all Initial Notes duly tendered
and not validly withdrawn prior to 5:00 p.m., New York City time, on ,
1998, unless extended by the Company in its sole discretion (the "'Expiration
Date"). Tenders of Initial Notes may be withdrawn at any time prior to 5:00
p.m. New York City time on the Expiration Date. The Exchange Offer is subject
to certain customary conditions. The Initial Notes were sold by the Company on
June 26, 1998 to NationsBanc Montgomery Securities, LLC and First Union
Capital Markets, a division of Wheat First Securities, Inc. (the "Initial
Purchasers") in a transaction not registered under the Securities Act in
reliance upon an exemption from registration under the Securities Act (the
"Offering"). The Initial Purchasers subsequently resold the Initial Notes in
the United States to qualified institutional buyers in reliance upon Rule 144A
under the Securities Act. Accordingly, the Initial Notes may not be reoffered,
resold or otherwise transferred in the United States unless registered under
the Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement (as defined herein) entered into by the Company
in connection with the Offering. See "Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. See "Exchange Offer."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in connection with resales of
Exchange Notes received in exchange for Initial Notes where such Initial Notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed that for a
period ending on the earlier of (i) 180 days from the date on which the
Exchange Offer Registration Statement is declared effective, and (ii) the date
on which a Participating Broker-Dealer is no longer required to deliver a
prospectus in connection with market making or other trading activities, it
will make this Prospectus available to any Participating Broker-Dealer for use
in connection with any such resale; provided, however, that the Company and
the Guarantors will have no obligation to amend or supplement this Prospectus
unless the Company has received written notice from a Participating Broker-
Dealer of their prospectus delivery requirements under the Securities Act
within fifteen (15) business days following consummation of the Exchange
Offer. See "Plan of Distribution."
Holders of Initial Notes not tendered and accepted in the Exchange Offer
will continue to hold such Initial Notes and will be entitled to all the
rights and benefits and will be subject to the limitations applicable thereto
under the Indenture and with respect to transfer under the Securities Act. In
the event that any changes in law or the applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer
or if any holder of the Initial Notes (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) is not eligible to participate in the Exchange Offer, and such holder has
satisfied certain conditions relating to the provision of information to the
Company for use therein, the Company will, at its cost, use its best efforts
to (a) file a shelf registration statement (the "Shelf Registration
Statement") covering resales of the Initial Notes, (b) cause the Shelf
Registration Statement to be declared effective under the Securities Act and
(c) keep continuously effective the Shelf Registration Statement for a period
of at least two years. Other than as set forth above, holders of Initial Notes
not tendered in the Exchange Offer will not retain any rights under the
Registration Rights Agreement, except in limited circumstances. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"Exchange Offer."
The Initial Notes are eligible for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") Market. There has not
previously been any public market for the Initial Notes or the Exchange Notes.
The Company does not intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the Exchange Notes
will develop. If a market for the Exchange Notes should develop, the Exchange
Notes could trade at a discount from their principal amount. See "Risk
Factors--Absence of Public Market Could Adversely Affect the Value of Notes."
Moreover, to the extent that Initial Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Initial Notes could be adversely affected.
The Company will not receive any proceeds from, and has agreed to bear all
registration expenses of, the Exchange Offer. No underwriter is being used in
connection with the Exchange Offer. See "'Exchange Offer--Fees and Expenses."
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the Commission a Registration
Statement on Form S-4 (the "Exchange Offer Registration Statement," which term
shall encompass all amendments, exhibits, annexes and schedules thereto)
pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the Exchange Notes being offered hereby. This Prospectus
does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to the Company,
the Guarantors and the Exchange Offer, reference is made to the Exchange Offer
Registration Statement. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Exchange Offer Registration Statement, reference is
made to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. The Exchange Offer Registration Statement, including the
exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 75 Park
Place, New York, New York 10007 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
can be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company and the Guarantors will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Company and the Guarantors to file periodic reports and other information
with the Commission will be suspended if the Exchange Notes are held of record
by fewer than 300 holders as of the beginning of any fiscal year of the
Company other than the fiscal year in which the Exchange Offer Registration
Statement is declared effective. The Company will nevertheless be required to
continue to file reports with the Commission if the Exchange Notes are listed
on a national securities exchange. The Indenture provides that, whether or not
required by the rules and regulations of the Commission, so long as any Notes
are outstanding and commencing with information relating to the fiscal quarter
ended July 31, 1998, the Company will furnish to the holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case, within the time periods specified
in the Commission's rules and regulations. In addition, commencing after the
consummation of the Exchange Offer, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless
the Commission will not accept such a filing) within the time periods
specified in the Commission's rules and regulations, and make such information
available to securities analysts and prospective investors upon their
reasonable request. In addition, each of the Company and the Guarantors has
agreed that, for so long as any Notes remain outstanding, it will furnish to
the Holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act.
i
NOTE REGARDING FORWARD-LOOKING INFORMATION
THE INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH ARE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "COULD," "SHOULD," "EXPECT," "ANTICIPATE," "INTEND," "PLAN,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREOF.
SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED ON VARIOUS ASSUMPTIONS
AND ESTIMATES AND ARE INHERENTLY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING RISKS AND UNCERTAINTIES RELATING TO THE POSSIBLE INVALIDITY OF THE
UNDERLYING ASSUMPTIONS AND ESTIMATES AND POSSIBLE CHANGES OR DEVELOPMENTS IN
SOCIAL, ECONOMIC, BUSINESS, INDUSTRY, MARKET, LEGAL AND REGULATORY
CIRCUMSTANCES AND CONDITIONS AND ACTIONS TAKEN OR OMITTED TO BE TAKEN BY THIRD
PARTIES, INCLUDING CUSTOMERS, SUPPLIERS, BUSINESS PARTNERS AND COMPETITORS AND
LEGISLATIVE, REGULATORY, JUDICIAL AND OTHER GOVERNMENTAL AUTHORITIES AND
OFFICIALS. IN ADDITION TO ANY RISKS AND UNCERTAINTIES SPECIFICALLY IDENTIFIED
IN THE TEXT SURROUNDING SUCH FORWARD-LOOKING STATEMENTS, THE STATEMENTS IN
"RISK FACTORS" CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL AMOUNTS, RESULTS, EVENTS AND CIRCUMSTANCES TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.
ii
SUMMARY
The following summary information is qualified in its entirety by reference
to, and should be read in conjunction with, the more detailed information and
Consolidated Financial Statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used herein, unless the context otherwise
requires, the terms "Company" and "CTS" refer to Coyne International
Enterprises Corp. d/b/a Coyne Textile Services and its subsidiaries. The
Company uses a 52/53 week fiscal year ending on the last Saturday in October.
For convenience, the dating of the financial information in this Prospectus has
been labeled as of and for the years ended October 31, 1997, 1996, 1995, 1994
and 1993 and as of and for the periods ended April 30, 1998 and 1997, as the
case may be, rather than the actual fiscal year end or fiscal period end dates.
THE COMPANY
GENERAL
The Company provides textile rental products and laundering services from 40
locations to approximately 40,000 accounts in diversified industries throughout
the eastern United States. Textile rental products provided by the Company
include workplace uniforms, protective clothing, shop towels and other reusable
absorbent products, floormats and treated mops and other dust control products.
The Company primarily rents textile products to clients under laundry service
contracts, but also sells products to clients and launders client-owned items.
Most of the Company's accounts are subject to written contracts that range in
duration from three to five years. The Company's products and services are
distributed through its route-based distribution system comprised of 18
industrial laundry plants and 21 sales, service and distribution laundry
terminals that allow the Company to provide rental services to customers in
geographic areas outside of the immediate area of an industrial laundry plant.
CTS manufactures shop towels, dust mops and several other products used in the
laundry business at its manufacturing subsidiary, Blue Ridge Textile
Manufacturing, Inc. ("Blue Ridge"), and intends to begin floormat manufacturing
in fiscal 1998.
The Company focuses on the value-added aspects of the textile rental
business, such as the heavy soil (e.g., printing inks, oils and solvents) and
protective garment sectors. The Company's products and services assist
customers with their corporate image, the productivity and safety of their
employees and the environmental impact of their businesses. For example, the
Company has built industry-leading heavy soil laundry plants, which minimize
its customers' environmental exposure and have allowed the Company to carve out
a leading position in the heavy soil sector of the textile rental services
industry. In addition, the Company works with clients to design, source and
manage protective uniform programs for specific applications, such as flame or
chemical retardant clothing for industrial workers. Further, the Company is one
of the first launderers to offer garment tracking technologies that provide its
customers with superior accountability for rented garments.
The Company's customer base is diversified across a variety of industries.
Customers range in size from large nationally-recognized businesses such as
ALCOA, Eckerd Drugs, Hershey, Oneida, United Technologies and Xerox, to smaller
businesses such as gas stations and other retail businesses. In particular, the
Company is a leading provider of textile rental services to the printing
industry throughout its service area, with customers including The New York
Times and USA Today. For the year ended October 31, 1997, the Company had net
sales and EBITDA of $122.9 million and $15.5 million, respectively, and for the
twelve months ended April 30, 1998, the Company had net sales and EBITDA of
$129.0 million and $15.6 million, respectively.
The Company was founded and incorporated in New York in 1929 and has been
owned and operated by the Coyne family since its inception.
1
INDUSTRY OVERVIEW
The textile rental industry in the United States, which had 1997 revenues in
excess of $9 billion, consists of two segments: the industrial segment
(uniforms, protective clothing, shop towels, floormats and dust control
products) and the linen segment (sheets, tablecloths and other linen items). In
1997, approximately 96% of the Company's business was derived from the
industrial segment. The primary product in the industrial segment is uniforms
which accounted for approximately one-half of the Company's revenues in 1997.
According to industry data compiled by the Uniform and Textile Service
Association ("UTSA"), approximately 46 million of the 128 million people in the
United States civilian workforce at the beginning of 1997 wore some form of
specialized work clothing. Of this total, only 15.4 million people or 33.5%
wore employer-owned uniforms and only 6.5 million people or 14.1% wore
employer-rented uniforms. The UTSA estimated that uniform rental services alone
generated approximately $4.8 billion and $5.3 billion in revenues during 1996
and 1997, respectively, and that this industry has grown at a compound annual
rate of approximately 7.2% since 1983.
The Company believes that much of the uniform industry's overall growth has
resulted from an increasing number of companies choosing to use uniform rental
services to maintain a high-quality corporate image, improve employee safety,
productivity and morale and reduce costs. In addition, the growth in jobs,
particularly in the service sector, has increased the number of potential
uniform wearers. In 1996 alone, more than ten million new jobs were created in
the United States with an estimated 65-70% of these jobs accounted for by
service industries whose employees tend to wear uniforms. CTS also believes
that growth in the rental segment of the industry in particular will be driven
by the broad trends to outsource non-core business functions. Growing markets
for uniforms identified by the Company include building services,
communications, food processing, heating/ventilation/air conditioning,
landscaping, pest control, pharmaceuticals, security and trucking.
In addition, the Company believes its industry-leading environmental
capabilities and protective clothing expertise strategically position it to
realize long-term benefits from continuing government regulation of the
environment and the workplace. Increasingly stringent environmental regulations
have been and continue to be the catalyst for a shift toward the outsourcing of
the laundering of heavy soil items. Additionally, government mandated safety
regulations for reflective wear and flame retardant garments and the most
recent report to Congress under The Workers' Family Protection Act from the
National Institute for Occupational Safety and Health ("NIOSH"), which states
that home laundering is inadequate in decontaminating work clothes, are
creating new opportunities for uniform service companies like CTS. The market
for flame retardant clothing has been fueled by Occupational Safety and Health
Agency ("OSHA") regulations holding employers responsible for supplying
appropriate clothing based on an evaluation of potential workplace hazards.
Employers are prohibited from supplying clothing that, when exposed to flames
or arcs, could increase the extent of wearer injury. Growth in demand for
environmental services and protective clothing is particularly valuable to the
Company because these markets involve long-term relationships with customers
and make use of the Company's technical knowledge of regulations, products,
fabric types, climatic conditions and job functions.
Although the industrial textile rental industry includes several national
companies, the industry remains highly fragmented. Based on information
obtained from Cleary Gull Reiland & McDevitt, an investment firm that closely
follows the uniform rental industry, there are currently over 700 uniform
rental businesses in operation, the majority of which are single facility
operators. The Company believes that many of these smaller companies are being
forced to exit the market due to a lack of economies of scale and the cost of
complying with increasingly stringent environmental standards. The Company
further believes that the industry will continue to experience consolidation in
the future and that strategic acquisition opportunities will become available.
2
COMPETITIVE STRENGTHS
The Company believes it has the following competitive strengths:
Superior Environmental Capabilities. The Company has built industry-leading
laundry waste-water treatment facilities and has developed a reputation as an
environmental leader. As a result, the Company believes that it is a leading
provider of heavy soil textile services to manufacturing and printing
businesses in the eastern United States. The Company also believes that it is
the largest provider of shop towels within its service area. Shop towels are
reusable cotton industrial wiping cloths that are essential to the printing and
furniture finishing industries and many manufacturing operations. Products such
as shop towels contaminated with petroleum, chemical solvents or printing inks
require specialized cleaning services that comply with environmental
regulations. The Company's industry-leading waste-water treatment equipment
recovers and recycles waste for use in fuel blending programs, thereby reducing
the amount of hazardous substances sent to landfills for disposal and
minimizing its customers' environmental exposure. The Company has built a
strong environmental team that is directed by a senior manager with extensive
experience both in the textile rental industry and as a former appointed
official of the Environmental Protection Agency ("EPA"). CTS has been endorsed
by many of the state and regional printing associations and services large
printing operations such as The New York Times and USA Today. As an extension
to its product line, the Company pioneered its Reusable Absorbent System
("RAS") products, which are used to absorb free liquids, such as lubricating
oils, around machines and equipment. The Company's RAS products are an
environmentally responsible and cost-effective alternative to traditional
disposable absorbents, and promote the EPA policy of waste minimization.
Finally, the Company processes heavy soil work for many of its competitors that
lack the same waste-water treatment capabilities as CTS. By providing heavy
soil laundry services to other industrial laundry facilities, CTS is able to
develop relationships with launderers that may be sold in the ongoing market
consolidation.
Protective Clothing Expertise. The Company believes that it is a recognized
leader in the rental and servicing of protective garments and has substantial
experience in designing, sourcing and managing these garments. Applications for
these protective garments include airplane refueling, metal and glass
manufacturing, oil refineries, petrochemical companies, pyrotechnic and
munitions companies and utilities. These garments are specially manufactured to
protect the wearer from a variety of workplace dangers. OSHA regulations hold
employers responsible for supplying appropriate clothing based on an evaluation
of potential workplace hazards. The protective clothing market requires
knowledge of regulations, products, fabric types, climatic conditions and job
functions. CTS has the expertise to help its customers conform to OSHA
regulations, the technical knowledge required to evaluate different types of
protective garments and the laundering capabilities to process the garments in
a manner that ensures the garments retain their protective properties over
their expected wear-life. The Company believes that its expertise in protective
garments in conjunction with the high-level of control provided by its garment
tracking capabilities gives it a significant advantage in the protective
garment market. ALCAN, ALCOA and Virginia Power are just a few of the major
accounts whose employees wear protective garments provided by CTS.
Garment Tracking Capabilities. The Company believes that it is one of the
first industrial launderers to implement bar-coding technologies, which provide
customers with superior accountability for rented garments and more economical
administration. CTS has invested in both bar-coding and radio frequency
identification technologies that give each rented garment a specific identity.
As a result, both CTS and its customers save time and money while promoting
productivity and improving inventory control. Garment tracking is particularly
important for protective clothing because of its higher replacement cost and
the necessity to closely monitor garment use compared to expected wear-life to
ensure the continued protective properties of the clothing. Further, the
Company provides both on-line and printed reporting to its customers. Bar-
coding is in place at most major accounts whose employees wear protective
garments provided by CTS, including ALCOA, Wyeth-Ayerst and Xerox.
3
Platform for Growth. The Company's recent investments in plants and equipment
have created laundry plant capacity to support growth without commensurate
increases in cost. In particular, the Company has introduced high-speed,
automated equipment in a majority of its laundry facilities. As a result, the
Company believes its existing plants and equipment could process approximately
25% more volume without significant increases in plant and equipment costs. The
Company believes that this capacity will allow it to support increased business
generated by its recently expanded sales force, respond faster to major account
installations, open laundry terminals in contiguous areas and take advantage of
acquisition opportunities.
Superior Fleet and Distribution Capabilities. The Company has developed a
superior fleet of approximately 450 trucks which provides a cost-effective link
among the Company's laundry plants, laundry terminals and customers. The
Company's fleet leverages existing laundry plant capacity by allowing the
Company to allocate work among its laundry plants in response to cost factors
and fluctuations in volume or capacity, and to enter into new contiguous
markets with minimal capital expenditures. The Company's trucks are a key tool
in projecting the Company's image, by displaying the corporate name, logo and
slogan "WE RENT CLEAN!" These trucks, which are custom-built in the Company's
Syracuse transportation facility, enhance productivity, quality of service and
safety. In addition, CTS saves approximately half of the costs associated with
purchasing a comparable fleet. Further, CTS has transportation facilities
throughout its service area that allow the fleet to be maintained at very high
standards. The Company has received multiple National Private Truck Council
Awards for the quality of its fleet and related maintenance.
BUSINESS STRATEGY
The Company intends to continue to grow its business by focusing on the
following strategies:
Leverage Competitive Strengths. The Company's superior environmental
capabilities, protective garment expertise and garment tracking capabilities
have enabled it to secure leadership positions in the heavy soil and protective
garment sectors of the market. CTS intends to focus on these sectors and then
leverage client relationships to sell additional products and generate
additional laundering service contracts. CTS believes that leveraging its
leadership position in these areas and expanding the number of services
provided to existing customers is an efficient and cost-effective method for
achieving future growth.
Leverage Existing Route System. The Company believes it can significantly
increase revenues and improve profitability by increasing sales along its
existing routes. Most of the geographic areas in which the Company has laundry
plants and truck routes contain a significant number of potential customers.
The Company intends to continue its penetration of these geographic areas by
using its recently increased sales force to aggressively market its expertise
in the heavy soil and protective garment niches of the market. Over the last
two years, the Company has increased the number of dedicated sales associates
from 25 to approximately 100 to ensure that all potential customers in existing
geographic areas are actively marketed. The Company also utilizes its route
salespeople to maximize sales to existing customers and develop new customer
relationships along existing routes.
Expand Geographic Scope in Contiguous Markets. The Company seeks to obtain
new business by utilizing its recently increased sales force to expand into
contiguous market areas that can be serviced from existing Company facilities.
The Company identifies attractive geographic markets for its services based on
the size of the market, the number and type of available customers and the
presence of existing competitors. Typically, the Company has expanded by
opening a laundry terminal location to service a new major account or buying a
small competitor and building the business over time, thereby leveraging the
Company's existing laundry plant investment. In addition, the Company has a
national account sales organization which targets larger customers with
nationwide operations that the Company can serve as the primary supplier of
textile rental services.
4
Provide Superior Customer Service. The Company seeks to distinguish itself
from its competitors by providing superior customer service. The Company serves
its customers with approximately 300 route salespersons, who generally interact
on a weekly basis with their customers, and more than 150 service support
people, who are responsible for expeditiously handling customer requirements
regarding the outfitting of new customer employees, garment repair and
replacement, billing inquiries and other matters. In addition, the Company
offers its customers a range of service options, including full-service rental
programs in which rental products are cleaned and maintained by the Company,
leasing programs in which these products are cleaned and maintained by
individual employees and direct sales of garments and other textile items. The
Company's newly-implemented Customer Management Program ("CMP") is a
computerized management tool used to measure and direct customer service
activities. This program gathers and organizes customer service data, delivers
key information regarding customer satisfaction to management and helps ensure
more targeted service to address customer preferences. Compensation of the
Company's managers in the laundry business is directly tied to their business
units' financial performance and customer satisfaction as determined by the
Company's CMP.
Pursue Strategic Acquisitions. The Company seeks to acquire textile rental
businesses that have customer accounts under contract, excellent service
reputations, and the size and quality of routes to serve as the Company's base
for expansion in an existing or new geographic market. In many cases, the
Company has purchased customer contracts and routes without buying fixed assets
normally associated with such contracts or routes. The textile rental industry
has experienced significant consolidation in recent years but remains highly
fragmented. The Company believes that increasingly stringent environmental
regulations are forcing many smaller companies to exit the market, which
provides the Company with significant opportunities for acquisitions and
expansion.
5
THE OFFERING
Initial Notes............... The Initial Notes were sold by the Company on
June 26, 1998 pursuant to a Purchase Agreement
dated June 23, 1998 (the "Purchase Agreement").
The Initial Purchasers subsequently resold the
Initial Notes in the United States to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act.
Registration Rights Pursuant to the Purchase Agreement, the Company
Agreement ................. and the Initial Purchasers entered into a
Registration Rights Agreement, dated June 26,
1998 (the "Registration Rights Agreement"), which
grants the holders of the Initial Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange rights
which terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
Securities Offered.......... $75,000,000 in aggregate principal amount of 11
1/4% Series B Senior Subordinated Notes of the
Company due 2008.
The Exchange Offer.......... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of
Initial Notes. As of the date hereof, $75,000,000
aggregate principal amount of Initial Notes are
outstanding. The Company will issue the Exchange
Notes to holders on or promptly after the
Expiration Date.
Based on no-action letters issued by the staff of
the Securities and Exchange Commission (the
"Commission") to third parties, the Company
believes the Exchange Notes issued pursuant to
the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in
the ordinary course of such holder's business and
such holder has no arrangement or understanding
with any person to participate in the
distribution of such Exchange Notes.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any
resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resales of Exchange Notes
received in exchange for Initial Notes where such
Initial Notes were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other
6
trading activities. The Company has agreed that
for a period ending on the earlier of (i) 180
days from the date on which the Exchange Offer
Registration Statement is declared effective, and
(ii) the date on which a Participating Broker-
Dealer is no longer required to deliver a
prospectus in connection with market making or
other trading activities, it will make this
Prospectus available to any Participating Broker-
Dealer for use in connection with any such
resale; provided, however, that the Company and
the Guarantors will have no obligation to amend
or supplement this Prospectus unless the Company
has received written notice from a Participating
Broker-Dealer of their prospectus delivery
requirements under the Securities Act within
fifteen (15) business days following consummation
of the Exchange Offer. See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the
Exchange Notes cannot rely on the position of the
staff of the Commission enunciated in no-action
letters and, in the absence of an exemption
therefrom, must comply with the registration and
prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by
the Company.
Expiration Date............. 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended by the
Company in its sole discretion, in which case the
term "Expiration Date" means that latest date and
time to which the "Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and Initial Interest on each Exchange Note will accrue from
Notes...................... the last date on which interest was paid on the
Initial Note surrendered in exchange thereof or,
if no interest has been paid on the Initial Note,
from the date of original issuance of such
Initial Note. No interest will be paid on the
Initial Notes accepted for exchange, and holders
of Initial Notes whose Initial Notes are accepted
for exchange will be deemed to have waived the
right to receive any payment in respect of
interest on the Initial Notes accrued up to the
date of the issuance of the Exchange Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer...................... customary conditions, which may be waived by the
Company. See "Exchange Offer--Conditions."
Procedures for Tendering Each holder of Initial Notes wishing to accept
Initial Notes.............. the Exchange Offer must complete, sign and date
the accompanying Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile thereof, together
with the Initial Notes and any other required
documentation to the Exchange Agent (as defined
herein) at the address set forth
7
herein. By executing the Letter of Transmittal,
each holder will represent to the Company that,
among other things, the Exchange Notes acquired
pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the person
receiving such Exchange Notes, whether or not
such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and that neither the holder nor any such
other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company.
In the case of any holder that is not a broker-
dealer, each such holder, by tendering, will also
represent to the Company that such holder is not
engaged in, and does not intend to engage in, a
distribution of the Exchange Notes. Each
Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange
for Initial Notes, where such Initial Notes were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other
trading activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such Exchange Notes. See "Exchange
Offer--Purpose and Effect of the Exchange Offer"
and "--Procedures for Tendering" and "Plan of
Distribution."
Untendered Initial Notes.... Following the consummation of the Exchange Offer,
holders of Initial Notes eligible to participate
but who do not tender their Initial Notes will
not have any further exchange rights and such
Initial Notes will continue to be subject to
certain restrictions on transfer. Accordingly,
the liquidity of the market for such Initial
Notes could be adversely affected.
Consequences of Failure to The Initial Notes that are not exchanged pursuant
Exchange................... to the Exchange Offer will remain restricted
securities. Accordingly, such Initial Notes may
be resold only (i) to the Company, (ii) pursuant
to an effective registration statement under the
Securities Act, (iii) pursuant to Rule 144A under
the Securities Act, (iv) outside the United
States to a foreign person pursuant to the
requirements of Rule 904 under the Securities
Act, or (v) pursuant to Rule 144 under the
Securities Act or pursuant to some other
exemption from registration under the Securities
Act . See "Exchange Offer--Consequences of
Failure to Exchange."
Shelf Registration In the event that any changes in law or the
Statement.................. applicable interpretations of the staff of the
Commission do not permit the Company to effect
the Exchange Offer or if any holder of the
Initial Notes (other than any such holder which
is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) is
not eligible to participate in the Exchange
Offer, and such holder has satisfied certain
conditions relating to the provision of
information to the Company for use therein, the
Company will, at its cost, use its best efforts
to (a) file a shelf registration statement (the
"Shelf Registration Statement") covering resales
of the Initial Notes, (b)
8
cause the Shelf Registration Statement to be
declared effective under the Securities Act and
(c) keep continuously effective the Shelf
Registration Statement for a period of at least
two years. Other than as set forth above, holders
of Initial Notes who do not tender in the
Exchange Offer will not have any continuing
rights under the Registration Rights Agreement.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Initial Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Initial
Notes, either make appropriate arrangements to
register ownership of the Initial Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
Guaranteed Delivery Holders of Initial Notes who wish to tender their
Procedures................. Initial Notes and whose Initial Notes are not
immediately available or who cannot deliver their
Initial Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Initial
Notes according to the guaranteed delivered
procedures set forth in "Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date. See "Exchange Offer--Withdrawal of Tenders"
Acceptance of Initial Notes
and Delivery of Exchange The Company will accept for exchange any and all
Notes...................... Initial Notes which are duly tendered in the
Exchange Offer and not validly withdrawn prior to
5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "Exchange
Offer--Terms of the Exchange Offer.
Certain Tax Consequences.... The exchange pursuant to the Exchange Offer
should not be a taxable event for Federal income
tax purposes. See "Certain Federal Income Tax
Considerations"
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange Offer.
See "Use of Proceeds."
Exchange Agent.............. IBJ Schroder Bank & Trust Company
9
THE EXCHANGE NOTES
General..................... The form and terms of the Exchange Notes are the
same as the form and terms of the Initial Notes
(which they replace) except that (i) the Exchange
Notes bear a Series B designation and a different
CUSIP number from the Initial Notes, (ii) the
Exchange Notes have been registered under the
Securities Act and, therefore, will not bear
legends restricting the transfer thereof and
(iii) the Exchange Notes will not contain certain
provisions included in the terms of the Initial
Notes relating to the timing of the Exchange
Offer. In addition, the holders of Exchange Notes
will not be entitled to certain rights under the
Registration Rights Agreement, including the
provisions providing for the payment of
Liquidated Damages in the event the Company fails
to satisfy certain obligations under the
Registration Rights Agreement, which rights will
terminate when the Exchange Offer is consummated.
See "Exchange Offer--Purpose and Effect of
Exchange Offer." The Exchange Notes will evidence
the same debt as the Initial Notes and will be
entitled to the benefits of the Indenture. See
"Description of Notes."
Securities Offered.......... $75,000,000 in aggregate principal amount of 11
1/4% Series B Senior Subordinated Notes due 2008
of the Company.
Maturity Date............... June 1, 2008.
Interest Payment Dates...... June 1 and December 1 of each year, commencing
December 1, 1998.
Subsidiary Guarantees....... The Exchange Notes will be unconditionally
guaranteed by each of the existing and future
Domestic Subsidiaries (as defined herein) of the
Company (each a "Guarantor" and, collectively,
the "Guarantors") other than the Receivables
Subsidiaries (as defined herein).
Subordination............... The Exchange Notes will be general unsecured
obligations of the Company, will rank subordinate
in right of payment to all Senior Debt and will
rank senior or pari passu in right of payment to
all existing and future subordinated indebtedness
of the Company. The Subsidiary Guarantees will be
general unsecured obligations of the Guarantors,
will rank subordinate in right of payment to all
Senior Debt of the Guarantors and will rank
senior or pari passu in right of payment to all
existing and future subordinated indebtedness of
the Guarantors. As of April 30, 1998, on an as
adjusted basis, the Exchange Notes would have
been subordinate to approximately $10.6 million
of Senior Debt. See "Risk Factors--
Subordination."
Optional Redemption......... On or after June 1, 2003, the Company may redeem
the Notes, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid
interest thereon and Liquidated Damages, if any,
to the date of redemption. See "Description of
Notes--Optional Redemption."
10
Change of Control........... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
repurchase all outstanding Notes at 101% of the
principal amount thereof plus accrued and unpaid
interest thereon and Liquidated Damages, if any,
to the date of repurchase. See "Description of
Notes--Repurchase at the Option of Holders--
Change of Control."
Covenants...................
The Indenture restricts, among other things, the
ability of the Company and its subsidiaries to
incur additional indebtedness, issue
preferred stock, enter into sale and leaseback
transactions, incur liens, pay dividends or make
certain other restricted payments, apply net
proceeds from certain asset sales, enter into
certain transactions with affiliates, merge or
consolidate with any other person, sell stock of
subsidiaries, and assign, transfer, lease, convey
or otherwise dispose of substantially all of the
assets of the Company. See "Description of
Notes--Certain Covenants."
Use of Proceeds............. The net proceeds of the Offering were used to
repay certain indebtedness, to repurchase
outstanding common stock warrants and for working
capital and general corporate purposes. See "Use
of Proceeds."
11
SUMMARY UNAUDITED AS ADJUSTED FINANCIAL INFORMATION
The unaudited financial information set forth in the following table is
adjusted to give effect to the sale of the Initial Notes and the application of
the proceeds therefrom as described in "Use of Proceeds" as if such
transactions had been consummated on the first day of each period presented.
The unaudited as adjusted financial information is presented for illustrative
purposes only and is not necessarily indicative of results that would have been
reported had such transactions actually occurred on the date specified, nor is
it indicative of the Company's future results. Operating results for the six
month period ended April 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending October 31, 1998. All financial
information in this table should be read in conjunction with the notes below
and the Company's Consolidated Financial Statements, the related notes, and
other information contained elsewhere in this Prospectus.
TWELVE MONTHS
SIX MONTHS ENDED
YEAR ENDED ENDED APRIL 30,
OCTOBER 31, 1997 APRIL 30, 1998 1998
---------------- -------------- -------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenue.................... $122,935 $ 67,028 $129,004
Gross profit................... 30,147 16,175 31,585
Income from operations......... 10,792 4,979 10,699
Interest expense (1)........... 26,743 22,214 26,870
Loss before income taxes and
extraordinary charge (2)...... $(15,951) $(17,235) $(16,171)
OTHER DATA:
Capital expenditures........... $ 2,584 $ 2,951 $ 4,313
Depreciation and amortization.. 5,004 2,617 5,171
EBITDA (3)..................... 15,496 7,446 15,570
EBITDA margin (3).............. 12.6% 11.1% 12.1%
Ratio of earnings to fixed
charges (4)................... -- -- --
Ratio of debt to EBITDA........ 5.3x 5.7x 5.3x
BALANCE SHEET DATA (AT PERIOD
END):
Working capital................ $ 11,297
Total assets................... 113,726
Total debt..................... 83,067
Shareholders' equity (deficit)
(5)........................... (8,910)
- -------
(1) Reflects an interest rate of 11 1/4% on the Initial Notes. Included in
interest expense, for each respective period, is a $17,257 charge for the
cost to redeem common stock warrants held by Capital Resource Lenders II
and Exeter Venture Lenders (the "Warrants") over their book carrying value.
The Warrants were redeemed with a portion of the proceeds of the Offering.
The Warrants were issued in 1994 in connection with the issuance of
subordinated notes having a face value of $12,000 (the "Old Notes") which
were also redeemed with a portion of the proceeds of the Offering.
(2) Excludes extraordinary charges attributable to the Old Notes of $1,292,
$1,013, and $1,150, respectively, for the write-off of unamortized
financing charges and original issue discount, net of taxes.
(3) The term EBITDA as used herein represents income from operations plus
depreciation and amortization, excluding amortization associated with
rental merchandise. EBITDA has been presented because the Company believes
it is commonly used in this or a similar format by investors to analyze and
compare operating performance and to determine a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flow from operations or
any other measure of income or cash flow that is prepared in accordance
with generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. EBITDA margin represents the
percentage of EBITDA to net revenue. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
(4) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. Earnings consist of income (loss) before income taxes plus
fixed charges, excluding capitalized interest. Earnings include a $17,257
pretax charge for the redemption of the Warrants. Fixed charges include
interest, whether expensed or capitalized, amortization of deferred
financing costs and that portion of rental expense estimated to be
attributable to interest. For the fiscal year ended October 31, 1997, the
six-months ended April 30, 1998 and the twelve-months ended April 30, 1998,
earnings were insufficient to cover fixed charges by $15,951, $17,235 and
$16,171, respectively.
(5) Shareholders' deficit includes a one-time charge of $17,257 incurred to
redeem the Warrants and reflects charges of $1,150, net of tax, associated
with the repayment of the Old Notes and various senior debt obligations as
of May 1, 1997. The amount of the shareholders' deficit varies in other
tables presented herein as a result of different effective dates of these
transactions for presentation purposes.
12
SUMMARY HISTORICAL FINANCIAL INFORMATION
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company as of
October 31, 1996 and 1997 and for each of the three years in the period ended
October 31, 1997, including the notes thereto, appearing elsewhere herein.
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------------------------------ -----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net revenue............ $107,745 $110,407 $117,768 $119,085 $122,935 $60,959 $67,028
Gross profit........... 24,221 23,003 25,231 25,737 30,147 14,737 16,175
Income from operations
(1)................... 7,222 5,292 7,595 8,179 10,792 5,072 4,979
Interest expense (2)... 4,659 5,516 6,254 6,786 6,715 3,410 20,652
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle............. 2,563 (224) 1,341 1,393 4,077 1,662 (15,673)
Provision for income
taxes................. 1,425 413 890 847 2,025 826 237
Income (loss) before
cumulative effect of
change in accounting
principles............ 1,138 (637) 451 546 2,052 836 (15,910)
Cumulative effect of
change in accounting
for income taxes (3).. -- (829) -- -- -- -- --
Net income (loss)...... $ 1,138 $ (1,466) $ 451 $ 546 $ 2,052 $ 836 $(15,910)
OTHER DATA:
Capital expenditures
(4)................... $ 4,745 $ 9,915 $ 8,731 $ 9,820 $ 2,584 $ 1,222 $ 2,951
Depreciation and
amortization.......... 3,366 3,780 4,416 4,779 5,289 2,596 2,755
EBITDA (5)............. 10,367 8,804 11,463 12,370 15,496 7,372 7,446
EBITDA margin (5)...... 9.6% 8.0% 9.7% 10.4% 12.6% 12.1% 11.1%
Ratio of earnings to
fixed charges (6)..... 1.4x -- 1.2x 1.2x 1.5x 1.4x --
BALANCE SHEET DATA (AT
PERIOD END):
Working capital........ $ 4,763 $ 8,812 $ 11,255 $ 6,608 $ 6,769 $ 6,877 $ 5,427
Total assets........... 77,478 85,001 93,170 97,432 102,621 95,573 110,116
Total debt............. 45,435 48,020 56,680 58,051 58,557 56,510 58,816
Warrants............... -- 1,743 1,743 1,743 1,743 1,743 19,000
Shareholders' equity
(deficit) (7)......... 7,978 6,996 7,373 7,845 9,897 8,681 (6,014)
- --------
(1) Income from operations for 1993 and 1994 includes gains from property
insurance claims of $364 and $828, respectively.
(2) Included in the six months ended April 30, 1998 is $17,257 of cost to
redeem the Warrants over their book carrying value. The Warrants were
issued in connection with the issuance of the Old Notes which were also
redeemed with a portion of the proceeds of the Offering.
(3) Attributable to the Company's adoption of Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes," effective
November 1, 1993.
(4) Capital expenditures in 1993 through 1996 included costs associated with
the construction of laundry plants in Buffalo, NY, Richmond, VA and New
Bedford, MA.
(5) The term EBITDA as used herein represents income from operations plus
depreciation and amortization, excluding amortization associated with
rental merchandise. EBITDA has been presented because the Company believes
it is commonly used in this or a similar format by investors to analyze and
compare operating performance and to determine a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flow from operations or
any other measure of income or cash flow that is prepared in accordance
with generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. EBITDA margin represents the
percentage of EBITDA to net revenue. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
(6) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. Earnings consist of income (loss) before income taxes plus
fixed charges, excluding capitalized interest. Earnings for the six months
ended April 30, 1998 include a $17,257 pretax charge for the redemption of
the Warrants. Fixed charges include interest, whether expensed or
capitalized, amortization of deferred financing costs and original issue
discount attributable to the Old Notes, and that portion of rental expense
estimated to be attributable to interest. For the year ended October 31,
1994 and the six months ended April 30, 1998, earnings were insufficient to
cover fixed charges by $224 and $15,673, respectively.
(7) Shareholders' deficit at April 30, 1998 includes a one-time charge of
$17,257 incurred to redeem the Warrants.
13
RISK FACTORS
This Prospectus includes "forward looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended ("Exchange Act"). Although the Company believes that
its plans, intentions and expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans,
intentions or expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's forward-looking
statements are set forth below and elsewhere in this Prospectus. All forward-
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by the cautionary statements set
forth below and elsewhere in this Prospectus.
LEVERAGE
The Company is highly leveraged. After giving an as adjusted effect to the
Offering and the application of the proceeds therefrom as of April 30, 1998,
the Company would have had total indebtedness of approximately $85.6 million
and shareholders' deficit of approximately $6.9 million. The Company and its
subsidiaries will be permitted to incur substantial additional indebtedness in
the future. See "Capitalization" and "Selected Financial and Operating Data"
and "Description of Notes."
The Company's ability to make scheduled payments of principal of, or to pay
the interest or Liquidated Damages, if any, on, or to refinance, its
indebtedness (including the Notes), or to fund planned capital expenditures
and research and development expense will depend on its future performance,
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond its
control. Based upon the current level of operations, anticipated cost savings
and revenue growth, management believes that cash flow from operations and
available cash, together with available borrowings under the New Credit
Facility (as defined herein), will be adequate to meet the Company's future
liquidity needs for the next several years. The Company may, however, need to
refinance all or a portion of the principal of the Notes on or prior to
maturity. There can be no assurance that the Company's business will generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements will be realized or that future borrowings will be
available under the New Credit Facility in an amount sufficient to enable the
Company to service its indebtedness, including the Notes, or to fund its other
liquidity needs. In addition, there can be no assurance that the Company will
be able to effect any such refinancing on commercially reasonable terms or at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to: (i)
making it more difficult for the Company to satisfy its obligations with
respect to the Notes, (ii) increasing the Company's vulnerability to general
adverse economic and industry conditions, (iii) limiting the Company's ability
to obtain additional financing to fund future working capital, capital
expenditures, research and development and other general corporate
requirements, (iv) requiring the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, research and development
or other general corporate purposes, (v) limiting the Company's flexibility in
planning for, or reacting to, changes in its business and the industry and
(vi) placing the Company at a competitive disadvantage vis-a-vis less
leveraged competitors. In addition, the Indenture and the New Credit Facility
contain financial and other restrictive covenants that will limit the ability
of the Company to, among other things, borrow additional funds. Failure by the
Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company. In addition, the degree to which the Company is leveraged could
prevent it from repurchasing all of the Notes tendered to it upon the
occurrence of a Change of Control. See "Description of Notes--Repurchase at
Option of Holder--Change of Control" and "Description of Other Indebtedness--
New Credit Facility."
14
SUBORDINATION
The Notes and the Subsidiary Guarantees are subordinated in right of payment
to all existing and future Senior Debt of the Company and the Guarantors.
However, the Indenture will provide that the Company will not, and will not
permit any of the Guarantors to, incur or otherwise become liable for any
indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Notes or any of the
Subsidiary Guarantees. Upon any distribution to creditors of the Company in a
liquidation or dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the Company or its
property, the holders of Senior Debt will be entitled to be paid in full
before any payment may be made with respect to the Notes. In addition, the
subordination provisions of the Indenture will provide that payments with
respect to the Notes will be blocked in the event of a payment default on
Senior Debt and may be blocked for up to 179 days each year in the event of
certain non-payment defaults on Senior Debt. In the event of a bankruptcy,
liquidation or reorganization of the Company, holders of the Notes will
participate ratably with all holders of subordinated indebtedness of the
Company that is deemed to be of the same class as the Notes, and potentially
with all other general creditors of the Company, based upon the respective
amounts owed to each holder or creditor, in the remaining assets of the
Company. In any of the foregoing events, there can be no assurance that there
would be sufficient assets to pay amounts due on the Notes. As a result,
holders of Notes may receive less, ratably, than the holders of Senior Debt.
As of April 30, 1998, on an as adjusted basis after giving effect to the
Offering and the application of the proceeds therefrom, the aggregate amount
of Senior Debt of the Company and its subsidiaries would have been
approximately $10.6 million, and giving effect to borrowing restrictions,
approximately $44 million would have been available for additional borrowing
under the New Credit Facility. The Indenture permits the incurrence of
substantial additional indebtedness, including Senior Debt, by the Company and
its subsidiaries in the future. See "Description of Other Indebtedness--New
Credit Facility."
POSSIBLE INABILITY TO FUND A CHANGE OF CONTROL OFFER
Upon a Change of Control, the Company will be required to offer to
repurchase all outstanding Notes at 101% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
repurchase. However, there can be no assurance that sufficient funds will be
available at the time of any Change of Control to make any required
repurchases of Notes tendered or that restrictions in the New Credit Facility
will allow the Company to make such required repurchases. Notwithstanding
these provisions, the Company could enter into certain transactions, including
certain recapitalizations, that would not constitute a Change of Control but
would increase the amount of debt outstanding at such time. See "Description
of Notes--Repurchase at Option of Holders."
FRAUDULENT CONVEYANCE
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if, among other things, the
Company or any Guarantor, at the time it incurred the indebtedness evidenced
by the Notes or its Subsidiary Guarantee, (i) (a) was or is insolvent or
rendered insolvent by reason of such occurrence or (b) was or is engaged in a
business or transaction for which the assets remaining with the Company or
such Guarantor constituted unreasonably small capital or (c) intended or
intends to incur, or believed or believes that it would incur, debts beyond
its ability to pay such debts as they mature, and (ii) the Company or such
Guarantor received or receives less than reasonably equivalent value or fair
consideration for the incurrence of such indebtedness, then the Notes and the
Subsidiary Guarantees, and any pledge or other security interest securing such
indebtedness, could be voided, or claims in respect of the Notes or the
Subsidiary Guarantees could be subordinated to all other debts of the Company
or such Guarantor, as the case may be. In addition, the payment of interest
and principal by the Company pursuant to the Notes or the payment of amounts
by a Guarantor pursuant to a Subsidiary Guarantee could be voided and required
to be returned to the person making such payment, or to a fund for the benefit
of the creditors of the Company or such Guarantor, as the case may be.
15
The measures of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or Guarantor would be considered
insolvent if (i) the sum of its debts, including contingent liabilities, were
greater than the saleable value of all of its assets at a fair valuation or if
the present fair saleable value of its assets were less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature or (ii)
it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, the Company and each Guarantor believes that, after giving
effect to the indebtedness incurred in connection with the Offering and the
New Credit Facility, it is not insolvent, does not have unreasonably small
capital for the business in which it is engaged and has not incurred debts
beyond its ability to pay such debts as they mature. There can be no
assurance, however, as to what standard a court would apply in making such
determinations or that a court would agree with the Company's or the
Guarantors' conclusions in this regard.
COMPETITION
The textile rental industry is highly competitive and several firms in the
industry are larger and have substantially greater financial and other
resources than the Company. The Company's leading competitors include ARAMARK
Corporation, Cintas Corporation, G&K Services, Inc., Unifirst Corp. and Unitog
Company. The Company also competes with numerous local and regional companies,
many of which enjoy cost advantages in their respective markets. In addition,
the Company may increasingly face competition in the future from businesses
that focus on selling uniforms and other related items. The Company believes
that the primary competitive factors that affect its operations are price and
its ability to meet customer specifications, which include design, quality and
service. To the extent existing or future competitors seek to gain or retain
market share by reducing prices, the Company may be required to lower its
prices, thereby adversely impacting operating results. As a result of these
factors, there can be no assurance that competition from existing or potential
competitors will not have a materially adverse effect on the Company's results
of operations. The Company's competitors also generally compete with the
Company for acquisition candidates, which has the effect of increasing the
price for acquisitions and reducing the number of available acquisition
candidates. See "Business--Competition."
GENERAL ECONOMIC CONDITIONS
The Company's business may be adversely affected by national or regional
economic slowdowns or by certain industry specific slowdowns. The Company's
operating results may also be adversely affected by events or conditions in a
particular area, such as adverse weather and other factors. In addition, the
Company's operating results may be adversely affected by increases in interest
rates that may lead to a decline in economic activity, while simultaneously
resulting in a higher interest expense to the Company under its New Credit
Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors including: general
economic conditions in the Company's markets; the timing of acquisitions and
of commencing start-up operations and related costs; the effectiveness of
integrating acquired businesses and start-up operations; the timing of capital
expenditures; seasonal rental and purchasing patterns of the Company's
customers; and price changes in response to competitive factors. In addition,
the Company's operating results historically have been seasonally lower during
the third fiscal quarter (May, June and July) than during the other quarters
of the fiscal year. The Company incurs various costs in integrating or
establishing newly acquired businesses or start-up operations, and the
profitability of a new location is generally expected to be lower in the
initial period of its operation than in subsequent periods. Start-up
operations in particular lack the support of an existing customer base and
require a significantly longer period to develop sales opportunities and meet
targeted operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality."
16
ENVIRONMENTAL REGULATION
The Company and its operations are subject to various federal, state and
local laws and regulations governing, among other things, the generation,
handling, storage, transportation, treatment and disposal of hazardous wastes
and other substances. In particular, the Company generates and must dispose of
significant quantities of laundry waste-water including detergent, petroleum
and other residues. In the past, the Company has settled or contributed to the
settlement of actions or claims brought against the Company relating to the
disposal of hazardous materials and there can be no assurance that the Company
will not have to expend material amounts to remediate the consequences of any
such disposal in the future. Further, under environmental laws, an owner or
lessee of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances located on or in or emanating from such
property, as well as related costs of investigation and property damage. Such
laws often impose liability without regard to whether the owner or lessee knew
of or was responsible for the presence of such hazardous or toxic substances.
There can be no assurance that acquired or leased locations have been operated
in compliance with environmental laws and regulations or that future uses or
conditions will not result in the imposition of liability upon the Company
under such laws or expose the Company to third-party actions such as tort
suits.
In addition, the EPA has recently proposed a federal environmental
regulatory framework applicable to industrial laundry operations, called
categorical pre-treatment standards, which would replace local regulations.
These regulations, scheduled to take effect in 1999, if implemented as
proposed, would require the Company and its competitors to expend substantial
amounts on compliance, thereby increasing operating costs and capital
expenditures. To the extent such costs and expenses could not be offset by
price increases, the Company's results of operations could be adversely
affected. Further, there can be no assurance of the final form of these
regulations or of the future course of environmental regulations in general.
Until such regulations are finalized, the Company is not able to determine the
cost of compliance.
The Company also believes that a substantial amount of its revenues are
attributable to customers that are concerned about environmental issues and
are seeking an environmentally responsible solution to their laundry needs.
Any changes in existing environmental regulations could affect such customer's
perceived value of the Company's services, possibly to a material degree.
ACQUISITIONS
The Company intends in the future to selectively pursue acquisitions of
textile rental businesses, routes and customer contracts, although the Company
has no present understandings, commitments or agreements with respect to any
such acquisitions. Future acquisitions by the Company could result in the
incurrence of debt and contingent liabilities and an increase in amortization
expenses related to goodwill and other intangible assets, which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies, services and
products of the acquired assets and the diversion of management's attention
from other business concerns. In the event that any such acquisition were to
occur, there can be no assurance that the Company's business, financial
condition and results of operations would not be materially adversely
affected. In addition, attractive acquisitions are difficult to identify and
complete for a number of reasons, including competition among prospective
buyers. There can be no assurance that the Company will be able to complete
future acquisitions. In order to finance such acquisitions, it may be
necessary for the Company to obtain additional funds either through public or
private financings, including bank and other secured and unsecured borrowings
and the issuance of debt or equity securities.
CONTROLLING SHAREHOLDERS
All of the Company's equity securities are owned of record by J. Stanley
Coyne or trusts established by him. See "Principal Shareholders." As a result,
J. Stanley Coyne and such trusts have the ability to elect the Board of
Directors of the Company, to approve or disapprove other matters requiring
shareholder approval, and to control the affairs and policies of the Company.
The interests of J. Stanley Coyne and such trusts as the sole equity holders
of the Company may differ from the interests of holders of the Notes.
17
DEPENDENCE ON SENIOR MANAGEMENT; ABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL
The Company's success is largely dependent on the skills, experience and
efforts of its senior management and certain other key personnel. If, for any
reason, one or more senior executives or key personnel were not to remain
active in the Company, the Company's results of operations could be adversely
affected. The Company's future success also depends upon its ability to
attract and retain qualified managers and technical and marketing personnel,
as well as a sufficient number of hourly workers. There is competition in the
market for the services of such qualified personnel and hourly workers and the
Company's failure to attract and retain such personnel or workers could
adversely affect the Company's results of operations. See "Business--
Employees" and "Management."
INFORMATION SYSTEMS; YEAR 2000
The Company has made a substantial investment in its information systems and
intends to spend significant amounts on its information systems in the future.
In particular, the Company is currently implementing new billing and route
accounting systems which are millennium ("Year 2000") compliant. Additionally
the Company is currently evaluating the programming code in its other existing
computer and software systems. The issue with respect to Year 2000 is whether
systems will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information could
generate erroneous data or cause complete system failures. There can be no
assurance that the Year 2000 problem will not have a material adverse effect
on the results of operations of the Company.
UNIONIZED WORK FORCE
As of April 30, 1998 the Company was subject to 29 collective bargaining
agreements covering approximately 800 of the Company's 1700 employees and the
number of employees of the Company covered by collective bargaining agreements
could increase in the future. There can be no assurance that the unions will
not engage in a work stoppage or strike in the future. Although the Company
believes that relations with the unions are satisfactory, a prolonged work
stoppage or strike by its unionized work force could have a material adverse
effect on the Company's results of operations. See "Business--Employees."
Certain employees of the Company are covered by union sponsored,
collectively bargained, multiemployer pension plans (the "Union Plans") which
may be subject to the withdrawal liability provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). In the event
that the Company incurs a complete or partial withdrawal from any of the Union
Plans, either by reducing or completely terminating all contributions to a
Union Plan or by permanently ceasing to have a legal obligation to contribute
to such Union Plan, the Company may be liable for its share of unfunded vested
benefits, if any, related to such Union Plan. Information from the
administrators of the Union Plans is not available to permit the Company to
determine its share of unfunded vested benefits, if any, related to the Union
Plans. The Company does not believe that it will incur such liability and, as
such, the Company has not recorded a charge for such liability. There can be
no assurance, however, that the Company will not be liable for any such
withdrawal liability, which liability could have a material adverse effect on
the Company's financial condition and results of operations. Such liability
may also cause an Event of Default under the Indenture and a default under the
Company's other indebtedness, including the New Credit Facility.
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF NOTES
Prior to the Exchange Offer, there has not been any public market for the
Exchange Notes. The Initial Notes have not been registered under the
Securities Act and are subject to restrictions on transferability to the
extent that they are not exchanged for Exchange Notes by holders who are
entitled to participate in this Exchange Offer. The holders of Initial Notes
who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Initial Notes. However, to the
extent the Initial Notes are tendered and accepted in the Exchange Offer, the
trading
18
market for the remaining untendered Initial Notes could be adversely affected.
The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek the admission thereof to
trading in the National Association of Securities Dealers Automated Quotation
System. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes, but they are not obligated to
do so and may discontinue such market making at any time. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the Exchange Offer and the
pendency of any Shelf Registration Statements. Accordingly, no assurance can
be given that an active public or other market will develop for the Exchange
Notes or as to the liquidity of the trading market for the Exchange Notes. If
a trading market does not develop or is not maintained, holders of the
Exchange Notes may experience difficulty in reselling the Exchange Notes or
may be unable to sell them at all. If a market for the Exchange Notes
develops, any such market may be discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of the Exchange Notes will depend on many factors, including, among
other things, prevailing interest rates, the Company's operating results and
the market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from
their principal amount.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the Exchange Notes in exchange for the Initial Notes pursuant to
the Exchange Offer will be made only after a timely receipt by the Company of
such Initial Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the
Initial Notes desiring to tender such Initial Notes in exchange for Exchange
Notes should allow sufficient time to ensure timely delivery. Neither the
Company nor the Exchange Agent is under any duty to give notification of
defects or irregularities with respect to the tenders of Initial Notes for
exchange. Initial Notes that are not tendered or are tendered but not accepted
will, following the consummation of the Exchange Offer, continue to be subject
to the existing restrictions upon transfer thereof and, upon consummation of
the Exchange Offer, certain registration rights under the Registration Rights
Agreement will terminate. In addition, any holder of Initial Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of
the Exchange Notes may be deemed to have received restricted securities and,
if so, will be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transactions. Each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Initial Notes, where such Initial Notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. Subject to
certain exceptions, the Company has agreed that for a period ending on the
earlier of (i) 180 days from the date on which the Exchange Offer Registration
Statement is declared effective, and (ii) the date on which a Participating
Broker-Dealer is no longer required to deliver a prospectus in connection with
market making or other trading activities, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any
such resale; provided, however, that the Company and the Subsidiary Guarantors
will have no obligation to amend or supplement this Prospectus unless the
Company has received written notice from a Participating Broker-Dealer of
their prospectus delivery requirements under the Securities Act within fifteen
business days following consummation of the Exchange Offer. See "Plan of
Distribution." To the extent that Initial Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Initial Notes could be adversely affected. See "Exchange Offer."
19
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights
Agreement. The Company will not receive any cash proceeds from the issuance of
the Exchange Notes offered hereby. In consideration for issuing the Exchange
Notes contemplated in this Prospectus, the Company will receive Initial Notes
in like principal amount, the form and terms of which are the same as the
forms and terms of the Exchange Notes (which they replace), except as
otherwise described herein. The Initial Notes surrendered in exchange for
Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase or
decrease in the indebtedness of the Company. As such, no effect has been given
to the Exchange Offer in the summary unaudited as adjusted financial
information or capitalization tables.
The proceeds received by the Company from the Offering were used principally
to repay certain indebtedness, repurchase the Warrants and pay transaction
fees and expenses relating thereto.
The following table and footnotes thereto set forth the source and uses of
funds in connection with the Offering (dollars in thousands):
SOURCE OF FUNDS:
Initial Notes........................................................ $75,000
USES OF FUNDS:
Repayment of old credit facilities (1)............................... $31,952
Redemption of Old Notes (2).......................................... 12,000
Redemption of Warrants (3)........................................... 19,000
Repayment of other debt.............................................. 5,092
Working capital and general corporate purposes....................... 3,956
Transaction fees and expenses........................................ 3,000
-------
Total Uses......................................................... $75,000
=======
- --------
(1) Includes repayment of old credit facilities consisting of loans payable to
NationsBank, N.A. (the "Bank"), an affiliate of NationsBanc Montgomery
Securities LLC, and the other lender thereto as follows: (a) a term loan
in the amount of $5,900 with interest payable monthly at an annual
interest rate equal to the Bank's prime rate plus 1.25%; (b) a term loan
in the amount of $10,000 with interest payable monthly at an annual
interest rate equal to the Bank's prime rate plus 1.5%; (c) an acquisition
facility in the amount of $1,047 with interest payable monthly at an
annual interest rate equal to the Bank's prime rate plus 1.75%; and (d) a
revolving credit facility in the amount of $15,005 with interest payable
monthly at an annual interest rate equal to the Bank's prime rate plus
1.0%. The Bank's prime rate was 8.5% at April 30, 1998.
(2) The Old Notes were payable to Capital Resource Lenders II and Exeter
Venture Lenders with interest payable quarterly at an annual interest rate
of 12.0%.
(3) Represents amounts paid or payable in connection with the redemption of
the Warrants as follows: $6,000 for the Warrants, $11,000 for an early
termination fee and $2,000 for a management fee. The $2,000 management fee
is payable over an 18 month period.
20
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
April 30, 1998 and (ii) the capitalization of the Company on an as adjusted
basis to give effect to the Offering of the Initial Notes and the application
of the proceeds therefrom. This table should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
AT APRIL 30, 1998
--------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
Long-term debt, including current maturities:
Senior debt:
Old credit facilities (1).............................. $31,952 --
Other debt (2)......................................... 15,676 $ 10,584
Subordinated debt:
Old Notes (2)(3)....................................... 11,188 --
Initial Notes.......................................... -- 75,000
------- --------
Total long-term debt..................................... 58,816 85,584
Warrants (2)............................................... 19,000 --
Shareholders' equity (deficit) (4)......................... (6,014) (6,860)
------- --------
Total capitalization................................... $71,802 $ 78,724
======= ========
- --------
(1) Contemporaneously with the completion of the Offering, the Company's old
credit facility was amended. See "Description of Other Indebtedness--New
Credit Facility."
(2) Reflects repayment of certain existing obligations from the proceeds of
the Offering. See "Use of Proceeds." For presentation purposes, this
assumes the payment of the entire $19,000 Warrant redemption obligation on
April 30, 1998. The management fee portion of this obligation ($2,000) is
payable over 18 months commencing on the closing of the Offering.
(3) Represents the carrying value of "Old Notes" having a face value of
$12,000.
(4) Shareholders' deficit includes a one-time charge of $17,257 incurred to
redeem the Warrants and reflects an after-tax extraordinary charge of
approximately $846 associated with the repayment of the Old Notes and
various senior debt obligations as of April 30, 1998. The amount of the
shareholders' deficit varies in other tables presented herein as a result
of different effective dates of these transactions for presentation
purposes.
21
SELECTED FINANCIAL AND OPERATING DATA
The selected financial data set forth below for the Company as of October
31, 1997 and 1996 and for each of the three years in the period ended October
31, 1997 are derived from the audited Consolidated Financial Statements
included elsewhere herein. The selected financial data for the years ended
October 31, 1993 and 1994 and for the six month period ended April 30, 1997
and 1998 are derived from unaudited Consolidated Financial Statements. The
unaudited Consolidated Financial Statements include all adjustments consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended April 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ended October 31, 1998. The data should be read in conjunction with the
Consolidated Financial Statements and related notes, and other financial
information included herein.
YEAR ENDED OCTOBER 31, SIX MONTHS ENDED APRIL 30,
---------------------------------------------------------------- ---------------------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- ------------------------ ------- ------------------------
ACTUAL AS ADJUSTED(8) ACTUAL ACTUAL AS ADJUSTED(8)
-------- -------------- ------- -------- --------------
(DOLLARS IN THOUSANDS)
STATEMENT OF
OPERATIONS DATA:
Net revenue........ $107,745 $110,407 $117,768 $119,085 $122,935 $122,935 $60,959 $ 67,028 $ 67,028
Gross profit....... 24,221 23,003 25,231 25,737 30,147 30,147 14,737 16,175 16,175
Income from
operations (1).... 7,222 5,292 7,595 8,179 10,792 10,792 5,072 4,979 4,979
Interest expense
(2)............... 4,659 5,516 6,254 6,786 6,715 26,743 3,410 20,652 22,214
Income (loss)
before provision
for income taxes,
extraordinary item
and cumulative
effect of change
in accounting
principles........ 2,563 (224) 1,341 1,393 4,077 (15,951) 1,662 (15,673) (17,235)
Provision for
income taxes...... 1,425 413 890 847 2,025 116 826 237 (388)
Income (loss)
before
extraordinary item
and cumulative
effect of change
in accounting
principles........ 1,138 (637) 451 546 2,052 (16,067) 836 (15,910) (16,847)
Extraordinary item,
net of tax (3).... -- -- -- -- -- 1,292 -- -- 1,013
Cumulative effect
of change in
accounting for
income taxes (4).. -- (829) -- -- -- -- -- -- --
Net income (loss).. $ 1,138 $ (1,466) $ 451 $ 546 $ 2,052 $(17,359) $ 836 $(15,910) $(17,860)
OTHER DATA:
Capital
expenditures (5).. $ 4,745 $ 9,915 $ 8,731 $ 9,820 $ 2,584 $ 2,584 $ 1,222 $ 2,951 $ 2,951
Depreciation and
amortization...... 3,366 3,780 4,416 4,779 5,289 5,004 2,596 2,755 2,617
EBITDA (6)......... 10,367 8,804 11,463 12,370 15,496 15,496 7,372 7,446 7,446
EBITDA margin (6).. 9.6% 8.0% 9.7% 10.4% 12.6% 12.6% 12.1% 11.1% 11.1%
Ratio of earnings
to fixed charges
(7)............... 1.4x -- 1.2x 1.2x 1.5x -- 1.4x -- --
BALANCE SHEET DATA
(AT PERIOD END):
Working capital.... $ 4,763 $ 8,812 $ 11,255 $ 6,608 $ 6,769 $ 10,822 $ 6,877 $ 5,427 $ 14,530
Total assets....... 77,478 85,001 93,170 97,432 102,621 105,488 95,573 110,116 115,937
Total debt......... 45,435 48,020 56,680 58,051 58,557 81,500 56,510 58,816 85,192
Warrants........... -- 1,743 1,743 1,743 1,743 -- 1,743 19,000 --
Shareholders'
equity (deficit)
(9)............... 7,978 6,996 7,373 7,845 9,897 (9,515) 8,681 (6,014) (7,963)
- -------
(1) Income from operations for 1993 and 1994 includes gains from property
insurance claims of $364 and $828, respectively.
(2) Included in the as adjusted columns and the six months ended April 30,
1998 is a $17,257 charge for the cost to redeem the Warrants over their
book carrying value. The Warrants were redeemed with a portion of the
proceeds of the Offering. The Warrants were issued in connection with the
issuance of the Old Notes which were also redeemed with a portion of the
proceeds of the Offering.
(3) Represents the extraordinary charge attributable to the write-off of
unamortized financing charges and original issue discount, net of taxes.
(4) Attributed to the Company's adoption of Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes," effective
November 1, 1993.
(5) Capital expenditures in 1993 through 1996 included costs associated with
the construction of laundry plants in Buffalo, NY, Richmond, VA and New
Bedford, MA.
(6) The term EBITDA as used herein represents income from operations plus
depreciation and amortization, excluding amortization associated with
rental merchandise. EBITDA has been presented because the Company believes
it is commonly used in this or a similar format by investors to analyze
and compare operating performance and to determine a company's ability to
service and/or incur debt. However, EBITDA should not be considered in
isolation or as a substitute for net income, cash flow from operations or
any other measure of income or cash flow that is prepared in accordance
with generally accepted accounting principles, or as a measure of a
company's profitability or liquidity. EBITDA margin represents the
percentage of EBITDA to net revenue. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
(7) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. Earnings consist of income (loss) before income taxes plus
fixed charges, excluding capitalized interest. Earnings for the six months
ended April 30, 1998 and as adjusted earnings for the year ended October
31, 1997 and six months ended April 30, 1998 include a $17,257 pretax
charge for the redemption of the Warrants (see notes to the Consolidated
Financial Statements). Fixed charges include interest, whether expensed or
capitalized, amortization of deferred financing costs and original issue
discount attributable to the Old Notes, and that portion of rental expense
estimated to be attributable to interest. On an as adjusted basis,
earnings were insufficient to cover fixed charges for the fiscal year
ended October 31, 1997 and the six months ended April 30, 1998 by $15,951
and $17,235, respectively. Actual earnings for the fiscal year ended
October 31, 1994 and the six months ended April 30, 1998 were insufficient
to cover fixed charges by $224 and $15,673 , respectively .
(8) The "As Adjusted" amounts give effect to the sale of the Initial Notes and
the application of proceeds as described in "Use of Proceeds," as if such
transactions had been consummated on the first day of the period
presented.
(9) Actual shareholders' deficit at April 30, 1998 includes a one-time charge
of $17,257 incurred to redeem the Warrants. Shareholders' deficit, as
adjusted includes the $17,257 charge and $1,150 of charges net of tax
associated with the repayment of the Old Notes and various senior debt
obligations. The amount of the shareholders' deficit varies in other
tables presented herein as a result of different effective dates of these
transactions for presentation purposes.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following should be read in conjunction with the "Selected Financial and
Operating Data," the Company's Consolidated Financial Statements and the
related notes thereto contained in this Prospectus.
The Company was founded in 1929 and currently provides textile rental
products and laundering services from 40 locations to approximately 40,000
accounts in diversified industries. Historically, the Company has grown
through a combination of internal growth at its existing locations, new
location start-ups and acquisitions. The Company has financed its new location
start-ups and acquisitions principally with internally generated cash flow,
secured borrowings and seller financing. Since the beginning of fiscal 1995,
the Company has completed various small acquisitions of routes and customer
contracts from local laundry companies, which in the aggregate have
contributed modestly to revenues. The Company has recently focused on
increasing revenues and profitability across its locations through investments
in sales force personnel and training, information systems, facilities and
equipment designed to improve asset utilization and through targeted marketing
efforts.
The Company's principal business is the rental and servicing of workplace
uniforms, protective clothing, industrial shop towels and other textile rental
products such as floormats and dust mops. The Company typically serves its
customers pursuant to written service contracts that range in duration from
three to five years. For fiscal 1995, 1996 and 1997, the Company's garment
rental operations (which include laundry services) produced approximately 48%
of its revenues, the rental of shop towels produced approximately 26% of its
revenues, and the rental of other products accounted for approximately 19% of
revenue in each of those years. In addition, the Company sells a full range of
garments, towels and other items directly to customers. These sales produced
on average approximately 7% of the Company's revenues in each of fiscal 1995,
1996 and 1997.
Although the Company's revenues grew modestly from $118 million in fiscal
1995 to $123 million in fiscal 1997, a compound annual rate of 2.1%, the
Company achieved a higher rate of earnings growth through the realization of
operating efficiencies and cost controls. EBITDA increased $4.0 million and
EBITDA as a percentage of revenue increased from 9.7% in fiscal 1995 to 12.6%
in fiscal 1997. The improved performance resulted, in large part, from the
realization of operating efficiencies and cost controls achieved in connection
with the Company's strategic management program initiated in 1996.
Additionally, the Company began compensating key personnel based on EBITDA
performance.
RESULTS OF OPERATIONS
The following table presents certain statements of historical operations
data as a percentage of sales for the periods indicated and should be read in
conjunction with the other financial information of CTS contained elsewhere in
this Prospectus.
SIX MONTHS
YEAR ENDED OCTOBER 31, ENDED APRIL 30,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
Net revenue...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit..................... 21.4 21.6 24.5 24.2 24.1
Selling expense.................. 2.0 1.7 2.6 2.3 4.1
Income from operations........... 6.4 6.9 8.8 8.3 7.4
Interest expense................. 5.3 5.7 5.5 5.6 5.1
Income before redemption of War-
rants and income taxes.......... 1.1% 1.2% 3.3% 2.7% 2.3%
Six Months Ended April 30, 1998 Compared to the Six Months Ended April 30,
1997
Net Revenue. Net revenues were $67.0 million for the six months ended April
30, 1998, representing an increase of $6.0 million or approximately 10.0% as
compared to $61.0 million for the six months ended April
23
30, 1997. The increase can be attributed to growth from existing operations
(6.2%), due substantially to the Company's recent investment in its sales
organization, and acquisitions (3.8%) of several small routes subsequent to
the first half of fiscal 1997.
Gross Profit. Gross profit for the six months ended April 30, 1998 of $16.2
million was $1.4 million or 9.8% greater than the same period last year. The
increase in gross profit was due to the increase in revenue. Gross margin was
24.1% for the period as compared with 24.2% for the same period last year.
Gross margin declined due to one-time costs associated with certain process
improvement initiatives, start-up activities in Florida and the Company
catalog business, each implemented in 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense was $11.2 million for the six months ended April 30,
1998, representing an increase of $1.5 million or 15.8% over the same period
in 1997. This increase was due primarily to selling expense which increased
$1.4 million or 93.5% to $2.7 million for the six months ended April 30, 1998.
The increase can be attributed to the significant expansion of the Company's
sales organization during fiscal 1998. This expansion included increases in
the number of personnel and related training costs, as well as related sales
and marketing costs. The Company anticipates that this expansion will generate
additional revenues; the Company began to see the impact of increased sales
during the first and second quarters of fiscal 1998. Growth in revenues is
expected to lag behind new selling costs, as it takes time for new sales
personnel to build books of long-term contracts.
Income from Operations. Income from operations was $5.0 million for the six
months ended April 30, 1998 as compared to $5.1 million for the six months
ended April 30, 1997. This nominal decrease resulted from an increase in one-
time costs associated with the significant investment in the sales
organization.
Interest Expense. Interest expense was $3.4 million for the six months ended
April 30, 1998 and for the six months ended April 30, 1997. Interest expense
remained at 1997 levels due to comparable rates and outstanding borrowings
during the periods. In May 1998, the Company entered into an agreement to
redeem the Warrants for $19.0 million. The excess of the redemption payment
over the book value of the Warrants of $17.3 million has been included in
interest expense for the six months ended April 30, 1998.
Income Taxes. The Company's tax provision of $0.2 million for the six month
period ended April 30, 1998 was $0.6 million less than the tax provision for
the same period in 1997. This reduction was due to the one-time charge
associated with management fees under the Warrant redemption agreement.
Net Income (Loss). Net loss was ($15.9) million for the six months ended
April 30, 1998, compared with net income of $0.8 million for the six months
ended April 30, 1997. This decrease was due to the one-time charge of $17.3
million associated with the Warrant redemption agreement. Excluding the
repurchase of the Warrants, net income for the six months ended April 30, 1998
would have been $0.8 million.
Fiscal Year 1997 Compared to Fiscal Year 1996
Net Revenue. Net revenue was $122.9 million in fiscal 1997, representing an
increase of $3.8 million or 3.2% as compared to $119.1 million in fiscal 1996.
The increase can be attributed to growth from existing operations (2.2%) and
acquisitions (1.0%). Several small acquisitions, primarily in the Atlanta and
Charlotte markets, during fiscal 1997 contributed $1.2 million during the
period.
Gross Profit. Gross profit for fiscal 1997 of $30.1 million was $4.4 million
greater than fiscal 1996. Gross margin improved to 24.5% for fiscal 1997 as
compared with 21.6% in fiscal 1996. This significant increase was due
primarily to the realization of operating efficiencies and cost controls
resulting from process improvement initiatives implemented in connection with
the Company's strategic management program.
Selling, General and Administrative Expense. Selling, general and
administrative expense was $19.4 million in fiscal 1997, representing an
increase of $1.8 million or 10.2% as compared to $17.6 million in fiscal 1996.
This increase was due primarily to selling expense which increased $1.2
million or 57.3% to $3.2 million
24
in fiscal 1997 as compared to $2.0 million in fiscal 1996. The increase can be
attributed to the significant expansion of the Company's sales organization
during fiscal 1997. This expansion included increases in the number of
personnel and related sales and marketing costs.
Income from Operations. Income from operations was $10.8 million in fiscal
1997, representing an increase of $2.6 million or 31.9% as compared to $8.2
million in fiscal 1996. This increase was due to both the revenue increase and
specific cost control programs in the laundering plants and in the corporate
offices implemented in fiscal 1997 which allowed for more efficient operations
and effective cost control.
Interest Expense. Interest expense remained at 1997 levels due to comparable
rates and outstanding borrowings during the years.
Income Taxes. The Company's effective tax rate for fiscal 1997 was
approximately 49.7% compared to an effective tax rate of approximately 60.8% in
fiscal 1996. This reduction in rate was due primarily to the significant
increase in taxable income during the period in relation to certain non-
deductible expenses such as the amortization of goodwill and meal and
entertainment costs.
Net Income. Net income was $2.1 million in fiscal 1997, representing an
increase of $1.6 million as compared to $0.5 million in fiscal 1996. The
improvement in net income was due to increased revenue in conjunction with
certain cost control initiatives which were part of the Company's strategic
management program.
Fiscal Year 1996 Compared to Fiscal Year 1995
Net Revenue. Net revenue was $119.1 million in fiscal 1996, representing an
increase of $1.3 million or 1.1% as compared to $117.8 million in fiscal 1995.
Revenues improved slightly due to price increases during fiscal 1996.
Gross Profit. Gross profit for fiscal 1996 of $25.7 million was $0.5 million
greater than fiscal 1995. Gross margin was 21.6% in fiscal 1996 compared with
21.4% in fiscal 1995. This modest increase was attributable to increased
revenue.
Selling, General and Administrative Expense. Selling, general and
administrative expense was $17.6 million in fiscal 1996, representing an
increase of $.4 million or 2.3% as compared to $17.2 million in fiscal 1995.
Income from Operations. Income from operations was $8.2 million in fiscal
1996, representing an increase of $0.6 million or 7.7% as compared to $7.6
million in fiscal 1995.
Interest Expense. Interest expense was $6.8 million in fiscal 1996,
representing an increase of $0.5 million or 8.5% as compared to $6.3 million in
fiscal 1995. The increase was due to a corresponding increase in debt
outstanding.
Income Taxes. The Company's effective tax rate in fiscal 1996 was
approximately 60.8% compared to an effective tax rate of approximately 66.4% in
fiscal 1995. This reduction in rate was primarily due to the effect of
permanent differences relating to the amortization of route intangibles.
Net Income. Net income was $0.5 million in fiscal 1996 and 1995.
SEASONALITY
The Company's operating results historically have been seasonally lower
during the third fiscal quarter (May, June and July) primarily because the
Company's floormat business is lower during this period than during the other
quarters of the fiscal year. Certain customers of CTS arrange to have the
floormats removed from their
25
accounts during the late spring and early summer months. In addition, schools
reduce or curtail their business during these months. See "Risk Factors--
Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been cash flow from
operations and borrowings under the old revolving credit facilities. For
information concerning the Company's old credit facilities and New Credit
Facility, see "Use of Proceeds" and "Description of Indebtedness--New Credit
Facility."
Net income was $2.1 million in fiscal 1997, representing an increase of $1.6
million as compared to $0.5 million in fiscal 1996. Cash provided by operating
activities of $6.3 million in fiscal 1997 was $1.3 million less than fiscal
1996 due to the significant investment in uniforms in service, as a result of
new rental contracts. Further, the cash used in investing activities of $2.2
million was approximately $1.7 million lower than the prior year. This
reduction was due to financing activities that allowed for investments to be
transacted with debt rather than cash. These investments included seller
financed acquisitions of $3.5 million, net of cash acquired, and purchases of
property, plant and equipment of $1.5 million. Net cash used in financing
activities of $3.1 million was $0.9 million less than fiscal 1996. The primary
financing activity in fiscal 1996 was repayment of long-term debt. During
fiscal 1997 the Company's repayments of long-term debt increased by $1.1
million. Cash at the end of fiscal 1997 of $1.3 million was $0.9 million
greater than at the beginning of the year.
During fiscal 1997, total capital expenditures amounted to $2.6 million,
primarily for laundry equipment and route vehicles. Capital expenditures were
$9.8 million in fiscal 1996 and $8.8 million in fiscal 1995. During fiscal
1996, the Company completed construction of its Buffalo, New York laundry
plant. During fiscal 1995, the Company completed construction of its New
Bedford, Massachusetts laundry plant. Maintenance capital expenditures are
expected to be approximately $4.0 million per year for the next several years.
During fiscal 1997, the Company acquired certain assets of several
industrial laundries which were accounted for as purchase transactions. The
aggregate purchase price of $4.6 million consisted of cash of $1.1 million and
notes payable of $3.5 million. The purchase price was allocated to various
assets, consisting primarily of purchased routes ($3.2 million).
On June 26, 1998, the Company sold to the Initial Purchasers $75,000,000
principal amount of the Initial Notes. The Initial Notes bear interest at 11
1/4% per annum from June 26, 1998, payable semiannually on June 1 and December
1 of each year, commencing on December 1, 1998.
Under the terms of the Registration Rights Agreement, the Company is
obligated to consummate the Exchange Offer pursuant to an effective
registration statement or to cause resales of the Initial Notes to be
registered under the Securities Act pursuant to an effective Shelf
Registration Statement. If the Exchange Offer Registration Statement or the
Shelf Registration Statement is not filed or declared effective, or if the
Exchange Offer is not consummated within the time periods set forth in the
Registration Rights Agreement, the Company will be required to pay Liquidated
Damages to each holder of Initial Notes. See "Description of Notes--
Registration Rights; Liquidated Damages."
The Initial Notes are general unsecured obligations of the Company, rank
subordinate in right of payment to all Senior Debt and rank senior or pari
passu in right of payment to all existing and future subordinated indebtedness
of the Company. The Initial Notes are unconditionally guaranteed on a senior
subordinated basis by all of the Company's current and future Domestic
Subsidiaries other than Receivables Subsidiaries. The Subsidiary Guarantees
are general unsecured obligations of the Guarantors, rank subordinate in right
of payment to all Senior Debt of the Guarantors and rank senior or pari passu
in right of payment to all existing and future subordinated indebtedness of
the Guarantors. The Initial Notes are redeemable at the option of the Company,
in whole or in part, on or after June 1, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest thereon and Liquidated Damages,
if any, to the redemption date. Upon a Change of Control, the Company will be
required to make an offer to repurchase all outstanding Initial Notes at 101%
of the principal
26
amount thereof plus accrued and unpaid interest thereon and Liquidated
Damages, if any, to the date of repurchase.
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness (including the Notes), or
to fund planned capital expenditures and research and development expense will
depend on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based upon the current level of
operations and anticipated revenue growth, management believes that cash flow
from operations and available cash, together with the proceeds from the
Offering and available borrowings under the New Credit Facility, will be
adequate to meet the Company's future liquidity needs for the next several
years. The Company may, however, need to refinance all or a portion of the
principal of the Notes on or prior to maturity. There can be no assurance that
the Company's business will generate sufficient cash flow from operations,
that anticipated revenue growth and operating improvements will be realized or
that future financings, including borrowings will be available under the New
Credit Facility in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or to fund its other liquidity needs. In
addition, there can be no assurance that the Company will be able to effect
any such refinancing on commercially reasonable terms or at all.
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to: (i)
making it more difficult for the Company to satisfy its obligations with
respect to the Notes, (ii) increasing the Company's vulnerability to general
adverse economic and industry conditions, (iii) limiting the Company's ability
to obtain additional financing to fund future working capital, capital
expenditures, research and development and other general corporate
requirements, (iv) requiring the dedication of a substantial portion of the
Company's cash flow from operations to the payment of principal of, and
interest on, its indebtedness, thereby reducing the availability of such cash
flow to fund working capital, capital expenditures, research and development
or other general corporate purposes, (v) limiting the Company's flexibility in
planning for, or reacting to, changes in its business and the industry and
(vi) placing the Company at a competitive disadvantage vis-a-vis less
leveraged competitors. In addition, the Indenture and the New Credit Facility
will contain financial and other restrictive covenants that will limit the
ability of the Company to, among other things, borrow additional funds.
Failure by the Company to comply with such covenants could result in an event
of default which, if not cured or waived, could have a material adverse effect
on the Company. In addition, the degree to which the Company is leveraged
could prevent it from repurchasing all of the Notes tendered to it upon the
occurrence of a Change of Control. See "Description of Notes--Repurchase at
Option of Holder--Change of Control" and "Description of Other Indebtedness--
New Credit Facility."
INFORMATION SYSTEMS; YEAR 2000
The Company intends to invest approximately $2.0 million during each of
fiscal 1998 and 1999 on information systems hardware and software to upgrade
certain of its Company-wide systems. In particular, the Company is currently
implementing new billing and route accounting systems which are millennium
("Year 2000") compliant. Additionally, the Company is currently evaluating the
programming code in its other existing computer and software systems.
The issue with respect to Year 2000 is whether systems will properly
recognize date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data
or cause complete system failures. There can be no assurance that the Year
2000 problem will not have a material adverse effect on the results of
operations of the Company.
EFFECTS OF INFLATION
Inflation has had the effect of increasing the reported amounts of the
Company's revenues and costs. However, the Company believes that it has been
able to recover increases in costs attributable to inflation through increases
in its prices and improvements in its productivity.
27
BUSINESS
GENERAL
The Company provides textile rental products and laundering services from 40
locations to approximately 40,000 accounts in diversified industries
throughout the eastern United States. Textile rental products provided by the
Company include workplace uniforms, protective clothing, shop towels and other
reusable absorbent products, floormats and treated mops and other dust control
products. The Company primarily rents textile products to clients under
laundry service contracts, but also sells products to clients and launders
client-owned items. Most of the Company's accounts are subject to written
contracts that range in duration from three to five years. The Company's
products and services are distributed through its route-based distribution
system comprised of 18 industrial laundry plants and 21 sales, service and
distribution laundry terminals that allow the Company to provide rental
services to customers in geographic areas outside of the immediate area of an
industrial laundry plant. CTS manufactures shop towels, dust mops and several
other products used in the laundry business at its Blue Ridge manufacturing
subsidiary and intends to begin floormat manufacturing in fiscal 1998.
The Company focuses on the value-added aspects of the textile rental
business, such as the heavy soil (e.g., printing inks, oils and solvents) and
protective garment sectors. The Company's products and services assist
customers with their corporate image, the productivity and safety of their
employees and the environmental impact of their businesses. For example, the
Company has built industry-leading heavy soil laundry plants, which minimize
its customers' environmental exposure and have allowed the Company to carve
out a leading position in the heavy soil sector of the textile rental services
industry. In addition, the Company works with clients to design, source and
manage protective uniform programs for specific applications, such as flame or
chemical retardant clothing for industrial workers. Further, the Company is
one of the first launderers to offer garment tracking technologies that
provide its customers with superior accountability for rented garments.
The Company's customer base is diversified across a variety of industries.
Customers range in size from large nationally-recognized businesses such as
ALCOA, Eckerd Drugs, Hershey, Oneida, United Technologies and Xerox, to
smaller businesses, such as gas stations and other retail businesses. In
particular, the Company is a leading provider of textile rental services to
the printing industry throughout its service area, with customers including
The New York Times and USA Today. For the year ended October 31, 1997, the
Company had net sales and EBITDA of $122.9 million and $15.5 million,
respectively, and for the twelve months ended April 30, 1998, the Company had
net sales and EBITDA of $129.0 million and $15.6 million, respectively.
The Company was founded and incorporated in New York in 1929 and has been
owned and operated by the Coyne family since its inception. The Company's
principal executive offices are located at 140 Cortland Avenue, Syracuse, New
York, 13221 and its telephone number is (315) 475-1626.
INDUSTRY OVERVIEW
The textile rental industry in the United States, which had 1997 revenues in
excess of $9 billion, consists of two segments: the industrial segment
(uniforms, protective clothing, shop towels, floormats and dust control
products) and the linen segment (sheets, tablecloths and other linen items).
In 1997, approximately 96% of the Company's business was derived from the
industrial segment. The primary product in the industrial segment is uniforms
which accounted for approximately 50.0% of the Company's revenues in 1997.
According to industry data compiled by the UTSA, approximately 46 million of
the 128 million people in the United States civilian workforce at the
beginning of 1997 wore some form of specialized work clothing. Of this total,
only 15.4 million people or 33.5% wore employer-owned uniforms and only 6.5
million people or 14.1% wore employer-rented uniforms. The UTSA estimated that
uniform rental services alone generated approximately $4.8 billion and $5.3
billion in revenues during 1996 and 1997, respectively, and that this industry
has grown at a compound annual rate of approximately 7.2% since 1983.
The Company believes that much of the uniform industry's overall growth has
resulted from an increasing number of companies choosing to use uniform rental
services to maintain a high-quality corporate image,
28
improve employee safety, productivity and morale and reduce costs. In
addition, the growth in jobs, particularly in the service sector, has
increased the number of potential uniform wearers. In 1996 alone, more than
ten million new jobs were created in the United States with an estimated 65-
70% of these jobs accounted for by service industries whose employees tend to
wear uniforms. CTS also believes that growth in the rental segment of the
industry in particular will be driven by the broad trends to outsource non-
core business functions. Growing markets for uniforms identified by the
Company include building services, communications, food processing,
heating/ventilation/air conditioning, landscaping, pest control,
pharmaceuticals, security and trucking.
In addition, the Company believes its industry-leading environmental
capabilities and protective clothing expertise strategically position it to
realize long-term benefits from continuing government regulation of the
environment and the workplace. Increasingly stringent environmental
regulations have been and continue to be the catalyst for a shift toward the
outsourcing of the laundering of heavy soil items. Additionally, government
mandated safety regulations for reflective wear and flame retardant garments
and the most recent report to Congress under The Workers' Family Protection
Act from the NIOSH, which states that home laundering is inadequate in
decontaminating work clothes, are creating new opportunities for uniform
service companies like CTS. The market for flame retardant clothing has been
fueled by OSHA regulations holding employers responsible for supplying
appropriate clothing based on an evaluation of potential workplace hazards.
Employers are prohibited from supplying clothing that, when exposed to flames
or arcs, could increase the extent of wearer injury. Growth in demand for
environmental services and protective clothing is particularly valuable to the
Company because these markets involve long-term relationships with customers
and make use of the Company's technical knowledge of regulations, products,
fabric types, climatic conditions and job functions.
Although the industrial textile rental industry includes several national
companies, the industry remains highly fragmented. Based on information
obtained from Cleary Gull Reiland & McDevitt, an investment firm that closely
follows the uniform rental industry, there are currently over 700 uniform
rental businesses in operation, the majority of which are single facility
operators. The Company believes that many of these smaller companies are being
forced to exit the market due to a lack of economies of scale and the cost of
complying with increasingly stringent environmental standards. The Company
further believes that the industry will continue to experience consolidation
in the future and that strategic acquisition opportunities will become
available.
COMPETITIVE STRENGTHS
The Company believes it has the following competitive strengths:
Superior Environmental Capabilities. The Company has built industry-leading
laundry waste-water treatment facilities and has developed a reputation as an
environmental leader. As a result, the Company believes that it is a leading
provider of heavy soil textile services to manufacturing and printing
businesses in the eastern United States. The Company also believes that it is
the largest provider of shop towels within its service area. Shop towels are
reusable cotton industrial wiping cloths that are essential to the printing
and furniture finishing industries and many manufacturing operations. Products
such as shop towels contaminated with petroleum, chemical solvents or printing
inks require specialized cleaning services that comply with environmental
regulations. The Company's industry-leading waste-water treatment equipment
recovers and recycles waste for use in fuel blending programs, thereby
reducing the amount of hazardous substances sent to landfills for disposal and
minimizing its customers' environmental exposure. The Company has built a
strong environmental team that is directed by a senior manager with extensive
experience both in the textile rental industry and as a former appointed
official of the EPA. CTS has been endorsed by many of the state and regional
printing associations and services large printing operations such as The New
York Times and USA Today. As an extension to its product line, the Company
pioneered its Reusable Absorbent System ("RAS") products, which are used to
absorb free liquids, such as lubricating oils, around machines and equipment.
The Company's RAS products are an environmentally responsible and cost-
effective alternative to traditional disposable absorbents, and promote the
EPA policy of waste minimization. Finally, the Company processes heavy soil
work for many of its competitors that lack the same waste-water treatment
capabilities as CTS. By providing heavy soil laundry
29
services to other industrial laundry facilities, CTS is able to develop
relationships with launderers that may be sold in the ongoing market
consolidation.
Protective Clothing Expertise. The Company believes that it is a recognized
leader in the rental and servicing of protective garments and has substantial
experience in designing, sourcing and managing these garments. Applications
for these protective garments include airplane refueling, metal and glass
manufacturing, oil refineries, petrochemical companies, pyrotechnic and
munitions companies and utilities. These garments are specially manufactured
to protect the wearer from a variety of workplace dangers. OSHA regulations
hold employers responsible for supplying appropriate clothing based on an
evaluation of potential workplace hazards. The protective clothing market
requires knowledge of regulations, products, fabric types, climatic conditions
and job functions. CTS has the expertise to help its customers conform to OSHA
regulations, the technical knowledge required to evaluate different types of
protective garments and the laundering capabilities to process the garments in
a manner that ensures the garments retain their protective properties over
their expected wear-life. The Company believes that its expertise in
protective garments in conjunction with the high-level of control provided by
its garment tracking capabilities gives it a significant advantage in the
protective garment market. ALCAN, ALCOA and Virginia Power are just a few of
the major accounts whose employees wear protective garments provided by CTS.
Garment Tracking Capabilities. The Company believes that it is one of the
first industrial launderers to implement bar-coding technologies, which
provide customers with superior accountability for rented garments and more
economical administration. CTS has invested in both bar-coding and radio
frequency identification technologies that give each rented garment a specific
identity. As a result, both CTS and its customers save time and money while
promoting productivity and improving inventory control. Garment tracking is
particularly important for protective clothing because of its higher
replacement cost and the necessity to closely monitor garment use compared to
expected wear-life to ensure the continued protective properties of the
clothing. Further, the Company provides both on-line and printed reporting to
its customers. Bar-coding is in place at most major accounts whose employees
wear protective garments provided by CTS, including ALCOA, Wyeth-Ayerst and
Xerox.
Platform for Growth. The Company's recent investments in plants and
equipment have created laundry plant capacity to support growth without
commensurate increases in cost. In particular, the Company has introduced
high-speed, automated equipment in a majority of its laundry facilities. As a
result, the Company believes its existing plants and equipment could process
approximately 25% more volume without significant increases in plant and
equipment costs. The Company believes that this capacity will allow it to
support increased business generated by its recently expanded sales force,
respond faster to major account installations, open laundry terminals in
contiguous areas and take advantage of acquisition opportunities.
Superior Fleet and Distribution Capabilities. The Company has developed a
superior fleet of approximately 450 trucks which provides a cost-effective
link among the Company's laundry plants, laundry terminals and customers. The
Company's fleet leverages existing laundry plant capacity by allowing the
Company to allocate work among its laundry plants in response to cost factors
and fluctuations in volume or capacity, and to enter into new contiguous
markets with minimal capital expenditures. The Company's trucks are a key tool
in projecting the Company's image, by displaying the corporate name, logo and
slogan "WE RENT CLEAN!" These trucks, which are custom-built in the Company's
Syracuse transportation facility, enhance productivity, quality of service and
safety. In addition, CTS saves approximately half of the costs associated with
purchasing a comparable fleet. Further, CTS has transportation facilities
throughout its service area that allow the fleet to be maintained at very high
standards. The Company has received multiple National Private Truck Council
Awards for the quality of its fleet and related maintenance.
BUSINESS STRATEGY
The Company intends to continue to grow its business by focusing on the
following strategies:
30
Leverage Competitive Strengths. The Company's superior environmental
capabilities, protective garment expertise and garment tracking capabilities
have enabled it to secure leadership positions in the heavy soil and
protective garment sectors of the market. CTS intends to focus on these
sectors and then leverage client relationships to sell additional products and
generate additional laundering service contracts. CTS believes that leveraging
its leadership position in these areas and expanding the number of services
provided to existing customers is an efficient and cost-effective method for
achieving future growth.
Leverage Existing Route System. The Company believes it can significantly
increase revenues and improve profitability by increasing sales along its
existing routes. Most of the geographic areas in which the Company has laundry
plants and truck routes contain a significant number of potential customers.
The Company intends to continue its penetration of these geographic areas by
using its recently increased sales force to aggressively market its expertise
in the heavy soil and protective garment niches of the market. Over the last
two years, the Company has increased the number of dedicated sales associates
from 25 to approximately 100 to ensure that all potential customers in
existing geographic areas are actively marketed. The Company also utilizes its
route salespeople to maximize sales to existing customers and develop new
customer relationships along existing routes.
Expand Geographic Scope in Contiguous Markets. The Company seeks to obtain
new business by utilizing its recently increased sales force to expand into
contiguous market areas that can be serviced from existing Company facilities.
The Company identifies attractive geographic markets for its services based on
the size of the market, the number and type of available customers and the
presence of existing competitors. Typically, the Company has expanded by
opening a laundry terminal location to service a new major account or buying a
small competitor and building the business over time, thereby leveraging the
Company's existing laundry plant investment. In addition, the Company has a
national account sales organization which targets larger customers with
nationwide operations that the Company can serve as the primary supplier of
textile rental services.
Provide Superior Customer Service. The Company seeks to distinguish itself
from its competitors by providing superior customer service. The Company
serves its customers with approximately 300 route salespersons, who generally
interact on a weekly basis with their customers, and more than 150 service
support people, who are responsible for expeditiously handling customer
requirements regarding the outfitting of new customer employees, garment
repair and replacement, billing inquiries and other matters. In addition, the
Company offers its customers a range of service options, including full-
service rental programs in which rental products are cleaned and maintained by
the Company, leasing programs in which these products are cleaned and
maintained by individual employees and direct sales of garments and other
textile items. The Company's newly-implemented Customer Management Program
("CMP") is a computerized management tool used to measure and direct customer
service activities. This program gathers and organizes customer service data,
delivers key information regarding customer satisfaction to management and
helps ensure more targeted service to address customer preferences.
Compensation of the Company's managers in the laundry business is directly
tied to their business units' financial performance, and customer satisfaction
as determined by the Company's CMP.
Pursue Strategic Acquisitions. The Company seeks to acquire textile rental
businesses that have customer accounts under contract, excellent service
reputations, and the size and quality of routes to serve as the Company's base
for expansion in an existing or new geographic market. In many cases, the
Company has purchased customer contracts and routes without buying fixed
assets normally associated with such contracts or routes. The textile rental
industry has experienced significant consolidation in recent years but remains
highly fragmented. The Company believes that increasingly stringent
environmental regulations are forcing many smaller companies to exit the
market, which provides the Company with significant opportunities for
acquisitions and expansion.
31
PRODUCTS AND SERVICES
The Company provides its customers with personalized workplace uniforms and
protective work clothing in a broad range of styles, colors, sizes and
fabrics. The Company's uniform products include shirts, pants, jackets,
coveralls, jumpsuits, smocks, aprons and specialized protective wear, such as
fire retardant and chemical protective garments. The Company also offers non-
garment items and services, such as shop towels, floormats, dust-control mops
and other textile products. Below is a chart displaying the approximate
percentages of revenues, by product-type:
UNIFORM & RAS & DUST CONTROL & DIRECT HOSPITAL &
PERIOD GARMENT RENTALS SHOP TOWELS MAT PRODUCTS SALES LINEN PRODUCTS
- ------ --------------- ----------- -------------- ------ --------------
Fiscal 1995............. 49.5% 27.2% 14.5% 5.6% 3.2%
Fiscal 1996............. 48.7 27.0 14.2 6.7 3.4
Fiscal 1997............. 48.8 27.3 13.9 6.8 3.2
Fiscal 1998(1).......... 47.2 27.9 14.6 6.5 3.8
- --------
(1)For the six month period ended April 30, 1998.
The Company offers its customers a range of garment service options,
including full-service rental programs in which garments are owned, cleaned
and serviced by the Company and lease programs in which garments are cleaned
and maintained by its customers' individual employees. The Company also offers
the opportunity to purchase garments and related items directly. As part of
its full-service rental business, the Company picks up a customer's soiled
uniforms or other items on a periodic basis (usually weekly) and, at the same
time, delivers cleaned and processed replacement items. The Company's
centralized services, specialized equipment and economies of scale generally
allow it to be more cost-effective in providing garment services than
customers could be by themselves, particularly those customers with high
employee turnover rates. Accordingly, the Company believes its services are
appealing to customers who seek to outsource non-core functions. The Company's
uniform programs help customers foster greater corporate identity, present a
consistent, high-quality image and improve employee safety, productivity and
morale.
The Company offers its customers "green" programs which focus on pollution
prevention. These programs are based on the Company's shop towel product which
is highly absorbent and reusable. CTS is endorsed by many of the state and
regional printing associations and services large printing operations such as
The New York Times and USA Today. Further, the Company offers its customers
Reusable Absorbent Systems ("RAS") socks and pads. RAS products provide
customers with environmentally responsible alternatives to single-use
disposable absorbents and promote the EPA policy of waste minimization. RAS
programs are in place at many large national accounts such as Crouse Hinds,
General Motors and United Technologies.
In recent years, the Company has made a significant corporate investment in
waste-water treatment in 10 of its 18 laundry plants. The Company's industry-
leading waste-water treatment capabilities allow it to process textiles
contaminated with petroleum, chemical solvents or printing inks that require
specialized cleaning services that comply with environmental regulations.
These facilities capture more than 98% of the waste solvents and oils in
liquid form and then recycle this liquid waste as a supplemental fuel in a
secondary fuel recycling program. This technology reduces the amount of waste-
water sludge sent to landfills for disposal and minimizes a customer's future
environmental liabilities. As a result of the Company's superior environmental
capabilities in the heavy soil sector market, the Company estimates that most
of the printing associations in the eastern United States have endorsed CTS as
the preferred provider of heavy soil textile services. CTS provides such
services to approximately 75% of the printing accounts in the eastern United
States. All CTS environmental matters are managed by the Company's
environmental team that is directed by a senior manager with extensive
experience both in the industry and as a former appointed official of the EPA.
This individual is recognized by both the TRSA and UTSA as a leading industry
expert in environmental matters and serves on their respective environmental
committees.
32
Finally, the Company processes heavy soil textile products for many of its
competitors because these competitors do not have the same waste treatment
capabilities as CTS. This permits the Company to develop relationships with
laundries that may be sold in the ongoing market consolidation.
Most of the Company's accounts are subject to written service contracts. The
Company's typical service contract ranges in duration from three to five years
with automatic "evergreen" renewals, except upon prior written notice, and
provides for significant liquidated damages upon early termination by the
customer.
The Company believes that it is one of the first industrial launderers to
implement bar-coding and radio frequency garment identification technologies.
These technologies allow the Company and its customers to track a garment from
pick-up at the customer's location through processing at the Company and
delivery back to the customer. Garment tracking is particularly important for
protective clothing because of its higher replacement cost and the need to
closely monitor garment use compared to expected wear-life. Garments can be
tracked by the use of bar code labels, which are permanently affixed to the
garment and which can be read by route salespeople using hand-held laser
scanners. The Company is able to provide reports to customers detailing the
status of every garment at all times. In addition, customized reports are
available and customers have the option to have direct-link PC capability,
allowing them access to real-time information about individual employee
garments. The Company believes that its tracking system improves inventory
control and efficiency by reducing human error that results in missing
uniforms and incomplete deliveries.
Soiled textile items are returned to the laundry plant directly from the
route system. These items are sorted by soil type and water washed in highly
automated industrial laundry equipment using customized wash formulas that
insure the cleanliness of these products while maximizing wear-life. Items are
then dried, sorted, folded and moved to the route staging area in the plant or
sent back to the terminal for distribution to the customer. In addition to
water washing, a small number of specialty items such as leather gloves are
dry cleaned. Chemicals used in dry cleaning operations are recycled. Waste-
water from water washing is processed in plant waste-water treatment
facilities and discharged in accordance with local municipal requirements.
SOURCING ACTIVITIES
The Company actively manages its supply chain and has, from time to time,
brought certain items in-house for manufacture on an opportunistic basis. For
example, due to the cost and inconsistent quality of shop towels available,
the Company began manufacturing shop towels in 1992. All of the shop towels
used in the Company's laundry business are produced at the Company's Blue
Ridge manufacturing facility and are marketed under the Blue Ridge name.
Approximately two-thirds of Blue Ridge manufactured shop towels are sold to
customers other than CTS. Although other sources of shop towels are available,
the Company believes that the superior performance of the Blue Ridge shop
towel, particularly in terms of durability and absorption, is a significant
advantage in securing heavy soil business. Blue Ridge manufactures dust mops,
aprons, laundry bags and RAS socks and pads and intends to begin floormat
production in late 1998. The Blue Ridge operations represented approximately
5.0% of the Company's revenues in fiscal 1997.
In order to take advantage of the opportunities presented by the North
American Free Trade Agreement, the Company manufactures work pants and shirts
in Mexico under agreements with several Mexican manufacturers. While the
Company does not anticipate substantial growth in its manufacturing
operations, it continues to consider manufacturing opportunities in order to
gain an advantage in the marketplace.
The Company has also developed, in conjunction with a New Zealand based
manufacturer, chemically protective and flame retardant garments that comply
with American National Standards Institute ("ANSI") standards for exclusive
distribution by CTS in the United States.
The Company purchases other rental merchandise from a variety of sources
including Garment Corporation of America, Perfect Jacket, RedKap and Universal
Overall. The Company believes that it is not dependent on any one supplier and
that alternative sources are available at comparable prices. The availability
of alternative
33
manufacturers and the Company's ability to change suppliers and manufacture
textile products allow it to optimally meet its merchandise requirements in
terms of quantity, quality and price.
CUSTOMERS
The Company's customer base is diversified across a variety of industries
and customers range in size from large nationally-recognized businesses such
as ALCOA, Eckerd Drugs, Hershey, Oneida, United Technologies and Xerox, to
smaller businesses, such as gas stations and other retail businesses. Typical
customers include automobile service centers and dealers, delivery services,
food and general merchandise retailers, food processors and service
operations, light manufacturers, maintenance facilities, printers and
publishers, restaurants, service companies, soft and durable goods
wholesalers, transportation companies, and others who require employee
clothing for image, identification, protection or utility purposes. The
Company currently services approximately 40,000 accounts in diversified
industries from 40 locations throughout the eastern United States. During the
past five years, no single customer accounted for more than 5.0% of total
revenues in any year.
SALES, MARKETING AND DISTRIBUTION
In 1996, the Company made a strategic decision to increase its sales force
from 25 to its current level of approximately 100 dedicated sales associates
to leverage its investment in laundry plants, laundry terminals and their
waste-water treatment facilities. Sales associates market the Company's
products and services to potential customers and develop new accounts. The
selling efforts of the sales force are managed by regional sales managers who
are also responsible for major account relationships within their region.
Rental and direct sales programs on the national level are handled by the
National Account Marketing Department, which call directly on existing and
prospective rental and direct sale national accounts. The regional sales
managers and National Account Marketing Department report directly to the Vice
President of Sales.
The Company's route salespeople continue to be an integral component of the
Company's sales and marketing efforts. Route salespeople have responsibility
for increasing sales to existing customers and establishing new customer
relationships along their routes. All of the Company's route salespeople are
paid commissions based on the weekly revenue of their route. Further, route
salespeople are incented to obtain an executed written contract from every
customer. CTS believes that its approach results in a professional sales team
that is highly motivated.
Each of the Company's dedicated sales associates and route salespeople is a
member of a laundry plant team. The compensation of each member is tied to the
collective performance of the laundry plant team.
The Company's catalog business operates under the Blue Ridge name and
distributes over 150,000 catalogs each season. This catalog offers a variety
of industrial garments and image apparel that is personalized with the logos
and names of its customers. The focus of the catalog is to facilitate the
growth of the Company's direct sales business and to establish relationships
with accounts currently under contract with competitors.
COMPETITION
The industrial segment of the textile rental industry is highly competitive.
The Company believes that the top five companies (ARAMARK Corporation, Cintas
Corporation, G&K Services, Inc., Unifirst Corporation and Unitog Company) in
the industrial segment of the industry currently account for approximately
half of the industry's sales. The Company believes that it is one of a small
group of companies that have revenues of approximately $50 million up to $200
million and which collectively account for approximately 25% of revenues from
the industrial segment. Within the industrial segment of the textile rental
industry, the Company believes it has established itself as a leader in the
heavy soil sector. The remainder of the industry is made up of over 700
smaller businesses, many of which serve one or a limited number of markets or
geographic service areas and generate annual revenues of less than $1.0
million. The Company believes that the primary competitive factors that affect
its operations are price and its ability to meet customers' product
specifications, which include design,
34
quality and service. The Company believes it maintains prices comparable to
those of its major competitors. The Company also believes that its ability to
compete effectively is enhanced by its environmental capabilities and its
superior customer service and support.
EMPLOYEES
As of April 30, 1998, the Company had approximately 1,700 employees. CTS is
a party to 29 collective bargaining agreements covering approximately 800
employees. These bargaining agreements expire periodically through 2001. The
Company's only work stoppage in the last ten years occurred in 1994 with
respect to one bargaining unit of one Company facility. This stoppage
represented a limited number of employees and had no material impact on the
Company's operations. The Company believes that its relationships with both
its union and non-union employees are good.
FACILITIES
As of April 30, 1998, the Company provided textile rental services from 40
facilities. The Company owns 21 of its facilities, including its corporate
headquarters in Syracuse, New York, and leases the balance of its facilities
pursuant to leases expiring between October 1998 and December 1999 with
options to renew in most cases, except for leases for certain garages and
small distribution facilities which are leased on a month-to-month basis. The
following table summarizes certain information concerning the Company's
facilities.
APPROXIMATE
LOCATION PRINCIPAL USE SQUARE FOOTAGE
- -------- ------------- --------------
Atlanta, GA* Laundry Plant/Laundry Terminal 18,000
Baltimore, MD** Laundry Plant/Laundry Terminal 85,000
Beckley, WV* Laundry Terminal 7,500
Belleville, NJ** Laundry Plant/Laundry Terminal 22,800
Betsy Layne, KY* Laundry Terminal 6,500
Blue Ridge, GA Manufacturing 42,500
Bristol, TN Laundry Plant/Laundry Terminal 27,200
Buffalo, NY*** Laundry Plant/Laundry Terminal 92,000
Burlington, VT Laundry Terminal 9,180
Cinnaminson, NJ* Laundry Terminal 10,000
Charlotte, NC* Laundry Terminal 7,500
Chattanooga, TN* Laundry Terminal 8,200
Cleveland, OH Laundry Plant/Laundry Terminal 85,000
Erie, PA Laundry Terminal 47,000
Evansville, IN* Laundry Terminal 7,500
Fairmont, WV* Laundry Terminal 6,500
Greenville, SC* Laundry Terminal 5,000
Hazleton, PA* Laundry Terminal 7,500
Huntington, WV Laundry Plant/Laundry Terminal 180,000
Joliet, IL* Laundry Terminal 8,000
Lakeland, FL* Laundry Plant/Laundry Terminal 12,000
Lewiston, ME* Laundry Terminal 6,500
London, KY** Laundry Plant/Laundry Terminal 24,000
Long Island, NY* Laundry Terminal 6,500
Nashville, TN* Laundry Terminal 7,500
New Bedford, MA** Laundry Plant/Laundry Terminal 85,000
Philadelphia, PA Laundry Plant 85,000
Pittsburgh, PA* Laundry Terminal 6,500
Raleigh, NC* Laundry Terminal 8,200
Richmond, VA Laundry Plant/Laundry Terminal 49,000
35
APPROXIMATE
LOCATION PRINCIPAL USE SQUARE FOOTAGE
- -------- ------------- --------------
Schenectady, NY** Laundry Plant/Laundry Terminal 25,000
Seaford, DE* Laundry Terminal 6,200
Smithboro, NY Laundry Terminal 6,500
Syracuse, NY Laundry Plant/Corporate Headquarters 220,000
Toledo, OH Laundry Plant/Laundry Terminal 65,000
Waterbury, CT Laundry Plant/Laundry Terminal 108,000
Winchester, VA* Laundry Terminal 9,200
Woodbridge, NJ* Corporate Sales Office 900
Worcester, MA Laundry Plant/Laundry Terminal 75,000
York, PA** Laundry Plant/Laundry Terminal 34,000
- --------
* Indicates leased facility.
** Company owns laundry plant but leases garage.
*** Financed by industrial revenue bonds.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. The Company does not believe that the outcome of any
of the matters in which it is currently involved will have a material adverse
effect on its financial condition, results of operations or cash flows.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to various federal, state and
local laws and regulations governing, among other things, the generation,
handling, storage, transportation, treatment and disposal of hazardous wastes
and other substances. In particular, industrial laundries use and must dispose
of detergent waste-water and other residues. The Company is attentive to the
environmental concerns surrounding the disposal of these materials and has
through the years taken measures to avoid their improper disposal. In the
past, the Company has settled, or contributed to the settlement of, actions or
claims brought against the Company relating to the disposal of hazardous
materials and there can be no assurance that the Company will not have to
expend material amounts to remediate the consequences of any such disposal in
the future. There have been no environmental claims brought against the
Company that have had a material adverse effect.
Further, under environmental laws, an owner or lessee of real estate may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in or emanating from such property, as well as
related costs of investigation and property damage. Such laws often impose
liability without regard to whether the owner or lessee knew of or was
responsible for the presence of such hazardous or toxic substances. There can
be no assurances that acquired or leased locations have been operated in
compliance with environmental laws and regulations or that future uses or
conditions will not result in the imposition of liability upon the Company
under such laws or expose the Company to third-party actions such as tort
suits.
In addition, the EPA has recently proposed categorical pre-treatment
standards, which form the basis for a federal environmental regulatory
framework applicable to industrial laundry operations that would replace local
regulations. Scheduled to take effect in 1999, these regulations, if
implemented as proposed, would require the Company, and its competitors, to
expend substantial amounts on compliance, thereby increasing the Company's
operating costs and capital expenditures. To the extent such costs and
expenses could not be offset through price increases, the Company's results of
operations could be adversely affected. Until such regulations are finalized,
the Company is not able to determine the cost of compliance.
36
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Company's
directors, executive officers and key employees:
NAME AGE POSITION
---- --- --------
Thomas M. Coyne......... 60 Chairman of the Board, President and Chief Executive Officer
J. Patrick Barrett...... 61 Director
Thomas C. Crowley
(1)(2)................. 51 Director
James W. Maher.......... 63 Director
William D. Matthews..... 63 Director
Wallace J. McDonald
(1).................... 57 Director
David P. O'Hara......... 51 Director and Assistant Secretary
Raymond T. Ryan (1)(2).. 69 Director
Dennis J. Bossi......... 53 Vice President of Operations
Paul H. Briele.......... 35 Director of Information Systems
John G. Harshall........ 50 Vice President of Operations
Donald F. X. Keegan..... 36 Vice President, Chief Financial Officer & Treasurer
Thomas E. Krebbeks...... 44 Corporate Controller
David I. Murray......... 48 Senior Vice President of Laundry Operations
Maher M. Najjar......... 36 Director of Technology
Stephen P. Naughton..... 42 Vice President, Reusable Absorbent Systems
Anthony F. O'Connor..... 48 Vice President of Sales & Marketing
Alexander Pobedinsky.... 36 General Counsel and Secretary
Paul E. Rebuck.......... 53 Director of Transportation
Frank E. Reid........... 81 Vice President of Operations
Robert E. Rudd.......... 44 Vice President of Engineering
Robert B. Schaffer...... 63 Director of Environmental Affairs
Timothy O. Taylor....... 44 Vice President of Blue Ridge Textile Manufacturing, Inc.
- --------
(1) Member of the Audit and Finance Committee.
(2) Member of the Human Resource and Compensation Committee.
Thomas M. Coyne is Chairman of the Board, President and Chief Executive
Officer of the Company. Mr. Coyne joined the Company in 1977 after spending 17
years with an engineering and construction company. He has served in various
positions responsible for plant operations and sales before his promotion to
President in 1982. Mr. Coyne currently serves on the Board of the Textile
Rental Services Association.
J. Patrick Barrett has been a director since July, 1998. He has been
President of Telergy, Inc., a telecommunication company, since April, 1998;
Chairman of Carpat Investments, a private investment firm, since 1987; was
Chairman and CEO of Avis Inc. from 1981 to 1987 and has been a director of
Lincoln National Corp. since 1990.
Thomas C. Crowley has been a Director of the Company since 1993. Mr. Crowley
has been the Executive Vice President of Evergreen Bancorp, Inc. in Glenn
Falls, New York since 1994. From 1979 to 1993, Mr. Crowley was an executive
with Fleet Bank.
James W. Maher has been a Director of the Company since 1995. From 1980 to
1995, Mr. Maher was the Chief Executive Officer and President of Crouse Irving
Memorial Hospital in Syracuse, New York.
William D. Matthews has been a Director of the Company since January 1997.
Mr. Matthews has been the Chairman of the Board and Chief Executive Officer of
Oneida, Ltd. in Oneida, New York since 1986. Oneida, Ltd. is listed on The New
York Stock Exchange. Mr. Matthews has been a director of CONMED Corporation
since 1997.
37
Wallace J. McDonald has been a Director of the Company since 1987. Mr.
McDonald has been a partner with the law firm of Bond, Schoeneck & King, LLP
based in Syracuse, New York since 1967.
David P. O'Hara has been a Director of the Company since 1982. Mr. O'Hara
was General Counsel and Secretary of the Company from 1981 to 1997. He
currently is Assistant Secretary of the Company and a partner with the law
firm of O'Hara, Hanlon, Knych & Pobedinsky, LLP based in Syracuse, New York.
Raymond T. Ryan has been a Director of the Company since 1991. From March
1991 through July 1995 he served as Chief Financial Officer of the Company. He
is currently Assistant Treasurer of the Company. Mr. Ryan has been an employee
of the Outaouais Group, Inc. since 1991. Mr. Ryan is a retired partner of
Coopers and Lybrand, LLP and was the tax partner for Coyne for 16 years.
Dennis J. Bossi has been a Vice President of Operations of the Company since
January 1984. From 1976 to 1983, Mr. Bossi was the Vice President of
Administration for Fisher Foods, Inc. where he served in various positions of
increasing responsibility.
Paul H. Briele joined the Company's MIS Department in September 1986. In
March 1996, he was promoted to his current position of Director of Information
Systems.
John G. Harshall joined the Company in October 1986 as General Manager of
the York, Pennsylvania laundry operation. In February 1995, Mr. Harshall was
promoted to his current position of Vice President of Operations. From 1984 to
1986, Mr. Harshall was a consultant to the grocery industry. From 1979 to
1983, he was the Senior Vice President of Store Operations for Fisher Foods,
Inc.
Donald F. X. Keegan has served as Vice President, Chief Financial Officer
and Treasurer of the Company since August 1995. From 1990 to 1995, Mr. Keegan
was Vice President of Operations and Chief Financial Officer of Jos. J.
Pietrafesa Co., a private label manufacturer of men's fine tailored clothing.
Mr. Keegan is a certified public accountant who began his career with Arthur
Andersen & Co. in New York, New York in 1983.
Thomas E. Krebbeks has been the Corporate Controller of the Company since
1991. Mr. Krebbeks began his career with Ernst & Young and is a certified
public accountant.
David I. Murray joined the Company in June 1998 as the Senior Vice President
of Operations. Prior to joining Coyne, Mr. Murray was employed with The Budget
Corporation from August 1993 to September 1997 as Vice President and General
Manager in the Rental Car Division. From November of 1991 to July 1997, Mr.
Murray was President/CEO of Consumers Auto Choice of Fresno, California.
Maher M. Najjar joined the Company's MIS Department in 1989. In August 1995
he was promoted to his current position of Director of Technology. He
currently serves on the Research Development Committee of the Textile Rental
Services Association.
Stephen P. Naughton joined the Company in 1989 as Director of Environmental
Affairs. In 1994, he assumed his current position of Vice President, Reusable
Absorbent Systems with direct responsibility for RAS marketing.
Anthony F. O'Connor joined the Company in October 1992 as General Manager of
the Belleville, New Jersey laundry operation. In February 1995, Mr. O'Connor
was promoted to Vice President of Operations. In July 1996, Mr. O'Connor was
promoted to his current position of Vice President of Sales & Marketing. From
1983 to 1992, Mr. O'Connor was a General Manager with ARAMARK Corporation.
Alexander Pobedinsky has been the General Counsel and Secretary of the
Company since 1997. Mr. Pobedinsky has been associated with the law firm of
O'Hara, Hanlon, Knych and Pobedinsky, LLP based in Syracuse, New York since
1991 and became a partner in 1996.
38
Paul E. Rebuck joined the Company in February 1996 as Director of
Transportation. From 1990 to 1996, Mr. Rebuck was the Director of
Transportation for P&C Supermarkets, a Penn Traffic Company.
Frank E. Reid has been a Vice President of Operations of the Company since
1995. Prior to joining the Company, Mr. Reid was a General Manager for 20
years with Unifirst Corporation in Springfield, Massachusetts.
Robert E. Rudd joined the Company in 1979. Since then he has held positions
in various aspects of plant operations, including plant redesign, automation
and construction. He was promoted to his current position of Vice President of
Engineering in October 1996.
Robert B. Schaffer joined the Company in 1993 as Director of Environmental
Affairs. Mr. Schaffer currently serves on the Environmental Committees of both
the Uniform and Textile Service Association and the Textile Rental Services
Association. From 1980 through 1992, Mr. Schaffer was a consultant with Ogden
Corp. where he was the leading environmental consultant to the UTSA and TRSA.
Prior to becoming a consultant, he worked for the EPA for 11 years.
Timothy O. Taylor joined the Company in October 1992 as General Manager of
Blue Ridge Textile Manufacturing, Inc. In 1995, he was promoted to his current
position of Vice President of Blue Ridge Textile Manufacturing, Inc.
COMPENSATION OF DIRECTORS
The Company pays each director a fee of $2,500 for each Board meeting
attended and $500 for each Committee meeting attended. The Board normally
meets four times per year and Committees meet two times per year. Directors
who are also employees of the Company or who provide other paid consulting or
advisory services to the Company do not receive compensation as directors. The
Company also reimburses each director for ordinary and necessary travel
expenses related to such directors attendance at Board of Directors and
Committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
President and each of the other four most highly compensated officers of the
Company (collectively, the "Named Executive Officers") for services rendered
in all capacities to the Company during the fiscal year ended October 31,
1997:
ANNUAL COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION (1)
--------------------------- ---------- --------- ----------------
Thomas M. Coyne
Chairman of the Board, President and
Chief Executive Officer................. $ 206,507 $ 50,000 $3,381
Donald F. X. Keegan
Vice President, Chief Financial Officer
and Treasurer........................... $ 130,000 $ 27,500 $2,827
Dennis J. Bossi
Vice President of Operations............. $ 115,000 $ 20,000 $2,785
Anthony F. O'Connor
Vice President of Sales and Marketing.... $ 85,231 $ 15,000 $1,518
John G. Harshall
Vice President of Operations............. $ 84,327 $ 20,000 $1,590
- --------
(1) Consists of premiums for disability policies paid by the Company of $981,
$427, $991, $0 and $0 and the Company matching contributions under the
401(k) Plan of $2,400, $2,400, $1,794, $1,518 and $1,590 for the benefit
of Messrs. Coyne, Keegan, Bossi, O'Connor and Harshall, respectively.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Company's Human Resources and Compensation Committee consists of Messrs.
Crowley and Ryan.
Mr. Ryan served as Chief Financial Officer of the Company from March 1991
through July 1995 and is currently Assistant Treasurer of the Company. Except
as described above, no officer of the Company serves as a member of the Human
Resources and Compensation Committee. Transactions with certain of the members
of such committee are discussed below under "Professional Services."
Robert C. Ammerman was a director of the Company and a member of the Human
Resources and Compensation Committee from 1994 until May 1998. Mr. Ammerman is
a partner of Capital Resource Partners, L.P. which is an affiliate of one of
the holders of the Old Notes and the Warrants. The Old Notes and the Warrants
were redeemed with a portion of the proceeds from the Offering.
CERTAIN TRANSACTIONS WITH MEMBERS OF THE COYNE FAMILY
At the Company's discretion, the Company has made salary continuation
payments totaling $100,000 per year to each of J. Stanley Coyne, a principal
shareholder of the Company, and Gerald Coyne, a son of J. Stanley Coyne,
including payments of such amounts in each of the last three fiscal years. In
addition, the Company has paid certain medical and personal expenses of J.
Stanley Coyne aggregating $74,104, $36,048, $93,451 and $38,021 during the
fiscal years ended October 31, 1995, 1996, and 1997 and the six months ended
April 30, 1998, respectively.
The Company has an outstanding note receivable from J. Stanley Coyne in the
amount of $1,256,250. This note bears interest at the applicable federal rate
as determined by the Internal Revenue Service (6.4% at October 31, 1997). This
note will become payable, with accrued interest, upon the death of J. Stanley
Coyne.
The Company has guaranteed the obligations of J. Stanley Coyne under a
promissory note payable in 2003 in the approximate amount of $2.0 million,
including accrued interest.
The Company makes advancements of $2,500 per month to Susan Whitney, the
daughter of J. Stanley Coyne. As of April 30, 1998, the total amount
outstanding was $20,000. The Company is also making advancements of $2,231 per
month to Gerald Coyne, a son of J. Stanley Coyne, to be used as mortgage
payments on his home. As of April 30, 1998, the total amount outstanding was
$68,000. These advancements will continue for thirty years or until the death
of Gerald Coyne and his wife. All advancements will be repaid to the Company
from such person's share of The J. Stanley Coyne Inter Vivos Irrevocable Trust
with interest at an annual rate of 9.5%.
The Company acquired certain residential property in central New York in
1995 at a cost of $320,000 for use by Thomas M. Coyne, Chairman of the Board,
President of the Company and Chief Executive Officer. Mr. Coyne paid the down
payment of $75,000 and the Company assumed a mortgage of $245,000 payable at
$2,900 per month for ten years. The mortgage bears interest at 7.5%. The
Company made mortgage payments of $0, $34,898, $34,898, and $17,449 during the
fiscal years ended October 31, 1995, 1996, and 1997 and the six months ended
April 30, 1998, respectively. The balance of the mortgage at April 30, 1998
was $203,217. Thomas M. Coyne has an option to acquire this property any time
for the unpaid balance of the mortgage, but in no event less than $100,000.
The Company approved a loan of $110,000 to Thomas M. Coyne in December 1997
at an interest rate of 9.5%. As of April 30, 1998, the total amount advanced
and outstanding was $75,000. This loan is payable at a rate of $2,000 per
month beginning January 1999, plus mandatory prepayments of principal equal to
Thomas M. Coyne's after-tax bonuses received from the Company.
40
PROFESSIONAL SERVICES
Raymond T. Ryan, a director of the Company, member of the Human Resources
and Compensation Committee, Audit and Finance Committee, and the Assistant
Treasurer of the Company, is an employee of The Outaouais Group, Inc., a
consulting firm, which provides various accounting, tax and financial services
to the Company. The Company paid fees of $0, $77,421, $68,662, and $32,496 to
The Outaouais Group, Inc. for various services during the fiscal years ended
October 31, 1995, 1996, and 1997 and the six months ended April 30, 1998,
respectively.
David P. O'Hara, a director and Assistant Secretary of the Company and
Alexander Pobedinsky, General Counsel and Secretary of the Company, are
partners with the law firm of O'Hara, Hanlon, Knych & Pobedinsky, LLP, which
provides legal services for the Company, including services in each of the
last three fiscal years. The Company paid fees of $623,456, $621,410,
$519,287, and $261,929 to O'Hara, Hanlon, Knych & Pobedinsky, LLP for various
services during the fiscal years ended October 31, 1995, 1996, and 1997 and
the six months ended April 30, 1998, respectively.
Wallace J. McDonald, a director of the Company and member of the Audit and
Finance Committee, is a partner in the law firm of Bond, Schoeneck & King,
LLP, which provides legal services for the Company, including services in each
of the last three fiscal years.
41
PRINCIPAL SHAREHOLDERS
The Company is authorized to issue 100,000 shares of Class A Common Stock,
par value $.01 per share ("Class A Common Stock"), 99,000 shares of Class B
Common Stock, par value $.01 ("Class B Common Stock"), 30,000 shares of Class
A Preferred Stock, par value $100 per share ("Class A Preferred Stock"), and
5,000 shares of Class B Preferred Stock, par value $500 per share ("Class B
Preferred Stock"). As of the date of this Prospectus, 2,923 shares of Class A
Common Stock, 74,030 shares of Class B Common Stock, 23,107 shares of Class A
Preferred Stock and 2,991 shares of Class B Preferred Stock were issued and
outstanding.
The shares of Class A Common Stock and Class B Common Stock are identical in
all respects, except for voting rights and certain conversion rights. Each
share of Class A Common Stock is entitled to one vote on all matters submitted
to a vote of the Company's shareholders. The shares of Class A Common Stock
are not convertible. The shares of Class B Common Stock do not have voting
rights, except as provided by applicable law. Each share of Class B Common
Stock will convert automatically into one share of Class A Common Stock upon
the happening of a sale of substantially all of the assets of the Company, any
sale of common stock, merger, consolidation, recapitalization or other change
in ownership of the capital stock of the Company that results in the
shareholders of the Company as of October 7, 1994 owning less than 51% of the
voting power of the Company, or the initial public offering of the Company's
Common Stock.
The shares of Class A Preferred Stock and Class B Preferred Stock are
identical in all respects, except for their stated par value and dividends.
The holders of both Class A and Class B Preferred Stock are entitled to non-
cumulative dividends at a rate of 5% per annum as and when such dividends are
declared by the Board of Directors out of funds legally available therefor. No
dividends may be declared or paid on the Class B Preferred Stock unless the
full 5% dividend for the current year shall have been declared and paid on the
Class A Preferred Stock. Historically, the Company has not paid dividends on
its preferred stock.
All of the Company's equity securities are owned of record by the Coyne
family or trusts established by them.
COMMON STOCK PREFERRED STOCK
------------------------------------------------- -------------------------------------------------
CLASS A (VOTING) CLASS B (NON-VOTING) CLASS A (NON-VOTING) CLASS B (NON-VOTING)
------------------------ ------------------------ ------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES SHARES SHARES SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
OWNED(1) OF CLASS OWNED (1) OF CLASS OWNED (1) OF CLASS OWNED (1) OF CLASS
------------ ---------- ------------ ---------- ------------ ---------- ------------ ----------
J. Stanley Coyne
Revocable Trust (2)(3).. -- -- 63,305 85.5% 19,745 85.5% 2,272 80.0%
J. Stanley Coyne Inter
Vivos Irrevocable Trust
(2)(4)................. 1,020 34.9% -- -- -- -- -- --
Thomas M. Coyne Blue
Ridge Trust (2)(5)..... 1,903 65.1% -- -- -- -- -- --
J. Stanley Coyne (2).... 1,020 (6) 34.9% 74,030 (7) 100% 23,107 (8) 100% 2,991 (9) 100%
- --------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") and includes voting or
investment power with respect to the securities. Accordingly they may
include securities owned by or for, among others, the spouse and/or minor
children or the individual and any other relative who has the same home as
such individual, as well as other securities as to which the individual
has or shares voting or investment power or has the right to acquire under
outstanding stock option within 60 days after the date of this table.
(2) The address of such beneficial owner is c/o Coyne International
Enterprises Corp., 140 Cortland Avenue, P.O. Box 4854, Syracuse, New York
13221.
(3) The trustees of this trust are J. Stanley Coyne, David P. O'Hara, Thomas
M. Coyne, Raymond T. Ryan and Wallace J. McDonald, who share voting and
investment power with respect to the shares held by this trust
42
and who may be deemed to be the beneficial owner of all such shares. Such
trustees disclaim beneficial ownership of these shares.
(4) The trustees of this trust are J. Stanley Coyne, David P. O'Hara, Thomas M.
Coyne, Raymond T. Ryan and Wallace J. McDonald, who share voting and
investment power with respect to the shares held by this trust and who may
be deemed to be the beneficial owner of all such shares. Such trustees
disclaim beneficial ownership of these shares.
(5) The trustees of this trust are Raymond T. Ryan and David P. O'Hara, who
share voting and investment power with respect to the shares held by this
trust and who may be deemed to be the beneficial owner of all such shares.
Such trustees disclaim beneficial ownership of these shares.
(6) Includes 1,020 shares owned by the J. Stanley Coyne Inter Vivos Irrevocable
Trust, of which J. Stanley Coyne is a co-trustee.
(7) Includes 63,305 shares owned by the J. Stanley Coyne Revocable Trust, of
which J. Stanley Coyne is a co-trustee.
(8) Includes 19,745 shares owned by the J. Stanley Coyne Revocable Trust, of
which J. Stanley Coyne is a co-trustee.
(9) Includes 2,272 shares owned by the J. Stanley Coyne Revocable Trust, of
which J. Stanley Coyne is a co-trustee.
43
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
Contemporaneously with the completion of the Offering , the Company amended
its old credit facility led by NationsBank, N.A. (the "Bank") (as amended, the
"New Credit Facility") to provide for (i) a $25.0 million revolving credit
facility, subject to availability as described below, (ii) a $20.0 million
capital expenditure facility and (iii) a $10.0 million acquisition facility.
All loans under the New Credit Facility will bear interest, at the Company's
option, at either (i) the Bank's prime rate plus 0.375% (in the case of the
revolving credit facility) or 0.625% (in the case of the capital expenditure
and acquisition facilities) or (ii) the London Interbank Offered Rate
("LIBOR") plus 2.25% (in the case of the revolving credit facility) or 2.5%
(in the case of the capital expenditure and acquisition facilities). Advances
under the revolving credit facility will be limited to (a) up to 85% of the
Company's eligible accounts receivable plus (b) the lesser of (i) the sum of
50% of the amount of eligible inventory consisting of new merchandise plus 25%
of the amount of eligible inventory consisting of in-service inventory or (ii)
$12.5 million. Additionally, the Company is required to maintain a minimum
available balance under the revolving credit facility of $1.0 million.
Advances under the capital expenditure facility will be based on up to 100% of
the net purchase price of the fixed assets for the first $4.0 million in any
year and 80% thereafter. Interest only is payable on the capital expenditure
facility during the first two years; thereafter, principal is payable in 20
quarterly payments, provided that all loans will come due upon termination of
the revolving credit facility. Advances under the acquisition facility will be
based on reasonable purchase price multiples provided that the proposed
acquisition generates sufficient cash flow to service the acquisition debt and
provided further that acquisitions in excess of $3.5 million in any fiscal
year will require the Bank's consent. Interest only is payable on the
acquisition facility during the first year; thereafter, principal will be
payable in 12 quarterly payments; provided that all loans will come due upon
termination of the revolving credit facility. The Company shall be required to
make annual mandatory prepayments in an amount equal to the lesser of (i)
$2,000,000 or (ii) 35% of the Company's excess cash flow, payable with
delivery of the Company's annual financial statements, to be applied to reduce
acquisition loans and capital expenditure loans.
The initial term of the New Credit Facility is five years and will renew for
additional one year periods thereafter unless terminated by either party. In
the event that the New Credit Facility is terminated by the Company prior to
the end of the original term, the Company will pay a fee of $262,500 except in
certain circumstances. The Company will pay an unused line fee of 0.375% per
year on the unused portion of the revolving credit facility up to $15.0
million and 0.25% per year on the unused portion in excess of $15.0 million,
payable monthly in arrears. The Company will pay letter of credit fees of 2.0%
per year on all outstanding letters of credit.
Borrowings under the New Credit Facility will be secured by a first priority
lien on the Company's accounts receivable and inventory as well as assets
financed under the capital expenditure facility and assets acquired through
acquisitions. The New Credit Facility will contain customary covenants and
restrictions on the Company's ability to engage in certain activities. In
addition, the New Credit Facility will provide that the Company must meet
certain financial conditions including (i) a minimum fixed charge coverage
ratio, (ii) a maximum ratio of funded debt to EBITDA, (iii) a minimum EBITDA
requirement and (iv) certain limitations on capital expenditures. The New
Credit Facility also will include customary events of default.
INDUSTRIAL REVENUE BOND FINANCING
In 1994, Midway-CTS Buffalo, Ltd. ("Midway"), a wholly-owned subsidiary of
the Company, entered into a $2.6 million industrial revenue bond financing
(the "IRB Financing") relating to the Company's Buffalo, New York facility
(the "Buffalo Facility"). In connection with the IRB Financing, Midway is
party to a lease-purchase agreement with the Erie County Industrial
Development Agency pertaining to the Buffalo Facility and
44
is a guarantor of the industrial revenue development bonds issued by the Erie
County Industrial Development Agency that financed such facility. The Buffalo
Facility lease payments equal the interest and principal payments due under
the related industrial development revenue bonds. The IRB Financing expires in
2005, bears a variable interest rate (which was 10% at April 30, 1998), and
has a 20 year amortization schedule with a bullet payment due at expiration.
45
EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Initial Notes were originally sold by the Company on June 26, 1998 to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Initial Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act. As a condition to
the Purchase Agreement, the Company entered into the Registration Rights
Agreement pursuant to which the Company agreed, for the benefit of the holders
of the Initial Notes, at the Company's cost to (i) file an Exchange Offer
Registration Statement with the Commission on or prior to 45 days after the
date of the original issuance of the Initial Notes, (ii) use its best efforts
to have the Exchange Offer Registration declared effective by the Commission
on or prior to 135 days after the date of the original issuance of the Initial
Notes, and (iii) cause the Exchange Offer to be consummated on the earliest
practicable date after the Exchange Offer Registration Statement has become
effective, but in no event later than 30 business days after the effective
date.
Upon the Exchange Offer Registration Statement being declared effective, the
Company will offer the Exchange Notes in exchange for surrender of the Initial
Notes. The Company will keep the Exchange Offer open for not less than 30 days
(or longer if required by applicable law) after the date on which notice of
the Exchange Offer is mailed to the holders of the Initial Notes. For each
Initial Note validly tendered to the Company pursuant to the Exchange Offer
and not withdrawn by the holder thereof, the holder of such Initial Note will
receive an Exchange Note having a principal amount equal to that of the
tendered Initial Note.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes.
Each holder of the Initial Notes (other than certain specified holders) who
wishes to exchange Initial Notes for Exchange Notes in the Exchange Offer will
be required to represent to the Company in the Letter of Transmittal, that,
among other things, the Exchange Notes acquired pursuant to the Exchange Offer
are being acquired in the ordinary course of business of the person receiving
such Exchange Notes, whether or not such person is the holder, that neither
the holder nor any such other person has any arrangement or understanding with
any person to participate in the distribution of such Exchange Notes and that
neither the holder nor any such other person in an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company. In the case of any
holder that is not a broker-dealer, each such holder, by tendering, will also
represent to the Company that such holder is not engaged in, and does not
intend to engage in, a distribution of the Exchange Notes. Each Participating
Broker-Dealer that receives Exchange Notes for its own account in exchange for
Initial Notes, where such Initial Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Commission has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of the Initial Notes), with the
prospectus contained in the Exchange Offer Registration Statement so long as
the prospectus otherwise meets the requirements of the Securities Act. Under
the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons subject to similar prospectus
delivery requirements, if any, to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of such Exchange
Notes. Subject to the exception described in the next paragraph, the Company
has agreed that for a period ending on the earlier of (i) 180 days from the
date on which the Exchange Offer Registration Statement is declared effective,
and (ii) the date on which a Participating Broker-Dealer is no longer required
to deliver a prospectus in connection with market making or other trading
activities, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale; provided, however,
that the Company and the Guarantors will
46
have no obligation to amend or supplement this Prospectus unless the Company
has received written notice from a Participating Broker-Dealer of their
prospectus delivery requirements under the Securities Act within fifteen (15)
business days following consummation of the Exchange Offer. See "Plan of
Distribution."
The Company shall not be required to amend or supplement the Exchange Offer
Registration Statement if (i) in the judgment of the Company's Board of
Directors exercised reasonably and in good faith the use of the Exchange Offer
Registration Statement and the disclosure required to be made therein would
materially interfere with a valid business purpose of the Company or the
Guarantors and (ii) the Company delivers a notice to such effect to such
Broker-Dealers setting forth the period of time (which shall not be greater
than 60 days) for which the Company's obligation to so amend or supplement the
Exchange Offer Registration Statement will be suspended.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer or if any holder of the Initial Notes is not eligible to participate in
the Exchange Offer, and subject to the exception described in the next
paragraph, the Company will, at its cost (a) file the Shelf Registration
Statement covering resales of the Initial Notes, (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep continuously effective the
Shelf Registration Statement for a period of at least two years. The Company
will, in the event of the filing of a Shelf Registration Statement, provide to
each holder of the Initial Notes copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement for the Initial Notes has become effective and take
certain other actions as are required to permit unrestricted resales of the
Initial Notes. A holder of Initial Notes that sells such Initial Notes
pursuant to the Shelf Registration Statement generally will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such a holder (including certain indemnification obligations).
In addition, each holder of the Initial Notes will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Initial Notes included in the Shelf Registration Statement and to benefit from
the provisions regarding Liquidated Damages set forth below.
If in the judgment of the Company's Board of Directors exercised reasonably
and in good faith the use of the Shelf Registration Statement and the
disclosure required to be made therein would materially interfere with a valid
business purpose of the Company or the Guarantors, the Company may deliver a
notice to such effect to the holders, and upon receipt of such notice, the
holders shall cease distribution of the Notes under a Shelf Registration
Statement for the period of time set forth in such notice (which shall not be
greater than 60 days).
If (a) the Company fails to file any of the Registration Statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements is not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to consummate the Exchange
Offer within 30 business days after the Effectiveness Target Date with respect
to the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter ceases to be effective or usable for its intended purpose
without being succeeded immediately by a post-effective amendment to such
Registration Statement that cures such failure and that is itself immediately
declared effective (each such event referred to in clauses (a) through (d)
above a "Registration Default"), then the Company and the Guarantors will pay
Liquidated Damages to each Holder of Initial Notes, with respect to the first
90-day period immediately following the occurrence of such Registration
Default, in an amount equal to $.05 per week per $1,000 principal amount of
Initial Notes held by such Holder. The amount of the Liquidated Damages will
increase by an additional $.05 per week per $1,000 principal amount of Initial
Notes with respect to each subsequent 90-day period until all Registration
Defaults have been cured, up to a maximum amount of Liquidated Damages of $.30
per week per $1,000 principal amount of Initial Notes. Following the cure of
all Registration Defaults, the accrual of Liquidated Damages will cease.
47
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by, all the provisions of the Registration Rights Agreement, a copy of which
is available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the Initial
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Initial Notes will not have any further registration rights and
such Initial Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Initial Notes
could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Initial
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Initial Notes accepted in the Exchange Offer. Holders may tender some or all
of their Initial Notes pursuant to the Exchange Offer. However, Initial Notes
may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Initial Notes (which they replace), except that (i) the Exchange Notes
will bear a Series B description and a different CUSIP number from the Initial
Notes, (ii) as of the date hereof the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting
their transfer and (iii) the Exchange Notes will not contain certain
provisions included in the terms of the Initial Notes relating to the timing
of the Exchange Offer. In addition, the holders of Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for the payment of Liquidated Damages in the event
the Company fails to satisfy certain obligations under the Registration Rights
Agreement, which rights will terminate when the Exchange Offer is consummated.
The Exchange Notes will evidence the same debt as the Initial Notes and will
be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $75,000,000 aggregate principal amount of
Initial Notes were outstanding. The Company has fixed the close of business on
[ ], 1998 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of the Initial Notes do not have any appraisal or dissenters' rights
under the New York Business Corporation Law or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Initial Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Initial Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Initial Notes will be
returned to the tendering holder thereof, at the Company's expense, as
promptly as practicable after the Expiration Date.
Holders who tender Initial Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Initial
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
48
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on ,
1998, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "'Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Initial Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions"
shall not have been satisfied prior to the Expiration Date, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent,
or (ii) to amend the terms of the Exchange Offer in any manner. Any such delay
in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof to the registered
holders.
INTEREST ON THE EXCHANGE NOTES
Interest on each Exchange Note will accrue from the last date on which
interest was paid on the Initial Note surrendered in exchange therefor or, if
no interest has been paid on the Initial Note, from the date of original
issuance of Initial Note. No interest will be paid on the Initial Notes
accepted for exchange, and holders of Initial Notes whose Initial Notes are
accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Initial Notes accrued up to the date of
the issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each June 1 and
December, commencing on December 1, 1998.
PROCEDURES FOR TENDERING
Only a holder of Initial Notes may tender such Initial Notes in the Exchange
Offer. For a holder to validly tender Initial Notes pursuant to the Exchange
Offer, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantee, or (in the case of
a book-entry transfer) an Agent's Message (as defined below) in lieu of the
Letter of Transmittal, and any other required documents, must be received by
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. The tender of Initial Notes via Agent's Message will not constitute
notice to the Company of a holder's status as a Participating Broker-Dealer.
Participating Broker-Dealers desiring to provide such notice must still do so
in writing within fifteen business days following the consummation of the
Exchange Offer. See "--Resale of the Exchange Notes." To be tendered
effectively, the Initial Notes, the Letter of Transmittal (or Agent's Message)
and other required documents must be completed and received by the Exchange
Agent at the address set forth below under "Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date. Delivery of the Initial
Notes may be made by book entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility (as defined
below) to and received by the Exchange Agent and forming a part of a book-
entry confirmation, which states that the Book-Entry Transfer Facility has
received an express acknowledgment from the tendering participant, which
acknowledgment states that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may
enforce the terms of the Letter of Transmittal against such participant.
By executing the Letter of Transmittal or delivering an Agent's Message,
each holder will make to the Company the representations set forth above in
the fourth paragraph under "Purpose and Effect of the Exchange Offer."
49
The tender by a holder and the acceptance thereof by the Company will
constitute an agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF INITIAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO
THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the Letter of Transmittal.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Initial Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on the Letter of Transmittal or the notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Initial Notes listed therein, such Initial Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Initial
Notes with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Initial Notes at the book-entry transfer facility, The Depository Trust
Company (the "Book-Entry Transfer Facility"), for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Initial Notes by causing such Book-Entry
Transfer Facility to transfer such Initial Notes into the Exchange Agent's
account with respect to the Initial Notes in accordance with the Book-Entry
Transfer Facility's procedures for such transfer. Although delivery of the
Initial Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee or Agent's Message and all other required documents must in each
case be transmitted to and received or confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to the Book-
Entry Transfer Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Initial Notes will be
determined by the Company in its sole discretion, which determination will be
50
final and binding. The Company reserves the absolute right to reject any and
all Initial Notes not properly tendered or any Initial Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Initial
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Initial Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of
Initial Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Initial Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Initial Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available, (ii) who cannot deliver their Initial Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer,
prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Initial Notes and principal amount of Initial Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Initial Notes (or a confirmation of book-
entry transfer of such Initial Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility), and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal or
facsimile thereof, as well as the certificate(s) representing all tendered
Initial Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Initial Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon three New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Initial Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Initial Notes in the Exchange Offer, a telegram,
telex, facsimile transmission or letter must be received by the Exchange Agent
at its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Initial Notes to be withdrawn (the
"Depositor"), (ii) identify the Initial Notes to be withdrawn (including the
certificate number(s) and principal amount of such delivered Initial Notes,
or, in the case of Initial Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited
and the transaction code number), (iii) state that such Depositor is
withdrawing its election to have the Initial Notes exchanged and specify the
name in which any such Initial Notes are to be registered and (iv) be
51
signed by the holder in the same manner as the original signature on the
Letter of Transmittal by which such Initial Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Initial Notes register the
transfer of such Initial Notes into the name of the person withdrawing the
tender. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Initial Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Initial Notes so withdrawn are validly retendered. Any Initial
Notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Initial Notes may be retendered by
following one of the procedures described above under "--Procedures for
Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any
Initial Notes, and may terminate or amend the Exchange Offer as provided
herein prior to the Expiration Date, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Initial Notes and
return all tendered Initial Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Initial Notes theretofore tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
to withdraw such Initial Notes (see "--Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Initial Notes which have not been withdrawn.
EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By registered or certified mail:
IBJ Schroder Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, NY 10274-0084
Attention: Reorganization Department
52
By overnight or hand delivery:
IBJ Schroder Bank & Trust Company
One State Street
New York, NY 10004
Attention: Securities Processing Window, Subcellar 1
(SCI)
By Facsimile: (212) 858-2611
Confirm: (212) 858-2103
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF
INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Initial Notes, which is face value, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
will be expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Initial Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Initial
Notes may be resold only (i) to the Company, (ii) pursuant to a registration
statement which has been declared effective under the Securities Act, in each
case in accordance with any applicable securities laws of any state of the
United States, (iii) so long as the Initial Notes are eligible for resale
pursuant to Rule 144A, to a person inside the United States whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements
of Rule 144A, (iv) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act or
(vi) in accordance with Rule 144 under the Securities Act, or pursuant to
another exemption from the registration requirements of the Securities Act
(and based upon an opinion of counsel reasonably acceptable to the Company),
in each case in accordance with any applicable securities laws of any state of
the United States and in accordance with the Indenture. Holders of Initial
Notes not tendered in the Exchange Offer will not retain any rights under the
Registration Rights Agreement, except in limited circumstances.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on an interpretation by the
staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
53
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who receives Exchange Notes in exchange for Initial Notes in
the ordinary course of business and who is not participating, does not intend
to participate, and has no arrangement or understanding with a person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating Broker-
Dealer that receives Exchange Notes for its own account in exchange for
Initial Notes, where such Initial Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. Subject to the exceptions described in
the next paragraph, the Company has agreed that for a period ending on the
earlier of (i) 180 days from the date on which the Exchange Offer Registration
Statement is declared effective, and (ii) the date on which a Participating
Broker-Dealer is no longer required to deliver a prospectus in connection with
market making or other trading activities, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any
such resale; provided, however, that the Company and the Guarantors will have
no obligation to amend or supplement this Prospectus unless the Company has
received written notice from a Participating Broker-Dealer of their prospectus
delivery requirements under the Securities Act within fifteen (15) business
days following consummation of the Exchange Offer.
The Company shall not be required to amend or supplement the Exchange Offer
Registration Statement if (i) in the judgment of the Company's Board of
Directors exercised reasonably and in good faith the use of the Exchange Offer
Registration Statement and the disclosure required to be made therein would
materially interfere with a valid business purpose of the Company or the
Guarantors and (ii) the Company delivers a notice to such effect to such
Broker-Dealers setting forth the period of time (which shall not be greater
than 60 days) for which the Company's obligation to so amend or supplement the
Exchange Offer Registration Statement will be suspended.
54
DESCRIPTION OF NOTES
GENERAL
The Initial Notes were issued, and the Exchange Notes will be issued,
pursuant to an Indenture (the "Indenture") among the Company, the Guarantors
and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"), in a
private transaction that is not subject to the registration requirements of
the Securities Act. See "Notice to Investors." The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
Notes are subject to all such terms, and Holders of Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture and the Registration
Rights Agreement does not purport to be complete and is qualified in its
entirety by reference to the Indenture and the Registration Rights Agreement,
including the definitions therein of certain terms used below. Copies of the
proposed form of Indenture and Registration Rights Agreement are available as
set forth below under "--Additional Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions." For purposes of this Description of Notes, the term "Company"
refers only to Coyne International Enterprises Corp. and not to any of its
Subsidiaries.
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to all current and future Senior Debt
including obligations under the New Credit Facility and the IRB Financing. As
of April 30, 1998, on an as adjusted basis giving effect to the Offering and
the application of the proceeds therefrom, the Company and its subsidiaries
would have had Senior Debt of approximately $10.6 million. The Indenture will
permit the incurrence of additional Senior Debt in the future.
The form and terms of the Exchange Notes are the same as the form and terms
of the Initial Notes (which they replace), except that (i) the Exchange Notes
will bear a Series B description and a different CUSIP number from the Initial
Notes, (ii) as of the date hereof, the Exchange Notes have been registered
under the Securities Act and, therefore, will not bear legends restricting
their transfer and (iii) the Exchange Notes will not contain certain
provisions included in the terms of the Initial Notes relating to the timing
of the Exchange Offer. In addition, the holders of Exchange Notes will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for the payment of Liquidated Damages in the event
the Company fails to satisfy certain obligations under the Registration Rights
Agreement, which rights will terminate when the Exchange Offer is consummated.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150.0 million, of
which $75.0 million were issued in the Offering, and will mature on June 1,
2008. Interest on the Notes will accrue at the rate of 11.25% per annum and
will be payable semi-annually in arrears on June 1 and December 1, commencing
on December 1, 1998, to Holders of record on the immediately preceding May 15
and November 15. Additional Notes may be issued from time to time, subject to
the provisions of the Indenture described below under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
Interest on the Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of original
issuance. Interest will be computed on the basis of a 360-day year comprised
of twelve 30-day months. Principal, premium, if any, and interest and
Liquidated Damages on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or,
at the option of the Company, payment of interest and Liquidated Damages may
be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the register of Holders of Notes; provided that all
payments of principal, premium, interest and Liquidated Damages with respect
to Notes the Holders of which have given wire transfer instructions to the
Company will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. The Notes will be
issued in denominations of $1,000 and integral multiples thereof.
55
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and severally
guaranteed (the "Subsidiary Guarantees") by each of the Company's current and
future Domestic Subsidiaries other than Receivables Subsidiaries. The
Subsidiary Guarantee of each Guarantor is subordinated to the prior payment in
full of all Senior Debt of such Guarantor, which, on an as adjusted basis
giving effect to the Offering and the application of the proceeds therefrom,
would include approximately $2.5 million of Senior Debt outstanding as of
April 30, 1998, and the amounts for which the Guarantors will be liable under
the guarantees issued from time to time with respect to Senior Debt. The
obligations of each Guarantor under its Subsidiary Guarantee is limited so as
not to constitute a fraudulent conveyance under applicable law. See, however,
"Risk Factors--Fraudulent Conveyance."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Notes, the Indenture, the Registration Rights Agreement and
(ii) immediately after giving effect to such transaction, no Default or Event
of Default exists.
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition,
by way of such a merger, consolidation or otherwise, of all of the capital
stock of such Guarantor) or the corporation acquiring the property (in the
event of a sale or other disposition of all of the assets of such Guarantor)
will be released and relieved of any obligations under its Subsidiary
Guarantee; provided that the Net Proceeds of such sale or other disposition
are applied in accordance with the applicable provisions of the Indenture. See
"Redemption or Repurchase at Option of Holders--Asset Sales."
SUBORDINATION
The payment of principal of, premium, if any, and interest and Liquidated
Damages on the Notes is subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the date of the Indenture or thereafter incurred. The
subordination is for the benefit of the holders of Senior Debt.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes, and until all
Obligations with respect to Senior Debt are paid in full, any distribution to
which the Holders of Notes would be entitled shall be made to the holders of
Senior Debt (except that Holders of Notes may receive and retain Permitted
Junior Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under "--
Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of
the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior Debt
that permits holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt. Payments on the Notes may and shall be resumed
56
(a) in the case of a payment default, upon the date on which such default is
cured or waived and (b) in case of a nonpayment default, the earlier of the
date on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated. No new period of
payment blockage may be commenced unless and until (i) 360 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice and
(ii) all scheduled payments of principal, premium, if any, and interest on the
Notes that have come due have been paid in full in cash. No nonpayment default
that existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 90 days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. On an as adjusted
basis, after giving effect to the Offering and the application of the proceeds
therefrom, the principal amount of Senior Debt outstanding at April 30, 1998
would have been approximately $10.6 million. The Indenture limits, subject to
certain financial tests, the amount of additional Indebtedness, including
Senior Debt, that the Company and its subsidiaries can incur. See "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to June 1, 2003.
Thereafter, the Notes will be subject to redemption at any time at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest and Liquidated
Damages thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on June 1 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2003................................................................. 105.625%
2004................................................................. 103.750%
2005................................................................. 101.875%
2006 and thereafter.................................................. 100.000%
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
57
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes pursuant to the
offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within thirty (30) days following
any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes on the date specified in such notice,
which date shall be no earlier than 30 days and no later than 60 days from the
date such notice is mailed (the "Change of Control Payment Date"), pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture
provides that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will
either repay all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility limits the ability of the Company to purchase Notes
and also provides that certain change of control events with respect to the
Company would constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Debt to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing Notes,
the Company could seek the consent of its lenders to the purchase of Notes or
could attempt to refinance the borrowings that contain such prohibition. If
the Company does not obtain such a consent or repay such borrowings, the
Company will remain prohibited from purchasing Notes. In such case, the
Company's failure to purchase tendered Notes would constitute an Event of
Default under the Indenture which would, in turn, constitute a default under
the New Credit Facility. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the Holders of Notes. See
"Risk Factors--Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
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The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or the
Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (evidenced by a resolution
of the Board of Directors set forth in an Officers' Certificate delivered to
the Trustee) of the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) at least 80% of the consideration therefor received by the
Company or such Subsidiary is in the form of cash; provided that the amount of
(x) any liabilities (as shown on the Company's or such Subsidiary's most recent
balance sheet) of the Company or any Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes
or any Guarantee thereof) that are assumed by the transferee of any such assets
and either (1) such assumption is evidenced by a customary novation agreement
that releases the Company or such Subsidiary from further liability or (2) all
such liabilities are paid in full within five days of such Asset Sale by the
transferee of such assets and (y) any securities, notes or other obligations
received by the Company or any such Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by the
Company or such Subsidiary into cash (to the extent of the cash received),
shall be deemed to be cash for purposes of this provision.
Within 180 days after the receipt of any Net Proceeds from an Asset Sale, the
Company may apply such Net Proceeds, at its option, (a) to repay Senior Debt
(and to correspondingly reduce lending commitments with respect thereto in the
case of Senior Debt that is term Indebtedness or revolving credit Indebtedness
and was incurred pursuant to a Credit Facility), (b) to the acquisition of a
majority of the assets of, or a majority of the Voting Stock of, another
Permitted Business, the making of a capital expenditure or the acquisition of
other long-term assets that are used or useful in a Permitted Business or (c)
reimburse the Company or its Subsidiaries for expenditures made, and costs
incurred to repair, rebuild, replace or restore property subject to loss,
damage or taking to the extent that Net Proceeds consist of insurance proceeds
received on account of such loss, damage or taking. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any manner
that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $5.0 million, the Company will be required to make an
offer to all Holders of Notes and all holders of other Indebtedness containing
provisions similar to those set forth in the Indenture with respect to offers
to purchase or redeem with the proceeds of sales of assets (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes and such other
Indebtedness that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture and
such other Indebtedness. To the extent that any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Company may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture. If the aggregate
principal amount of Notes and such other Indebtedness tendered into such Asset
Sale Offer surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes and such other Indebtedness to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero.
59
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any other payment or distribution on account of the Company's or any of
its Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any of
its Subsidiaries) or to the direct or indirect holders of the Company's or any
of its Subsidiaries' Equity Interests in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or to the Company or a Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company (other than any such Equity Interests owned by the Company or
any Subsidiary of the Company that is a Guarantor); (iii) make any payment on
or with respect to, or purchase, redeem, defease or otherwise acquire or retire
for value any Indebtedness that is subordinated to the Notes, except a payment
of interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (vii) and (viii) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) $2.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from
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clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption,
repurchase or other acquisition of pari passu or subordinated Indebtedness with
the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(iv) the payment of any dividend by a Subsidiary of the Company to the holders
of its common Equity Interests on a pro rata basis; (v) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
of the Company or any Subsidiary of the Company held by any member of the
Company's (or any of its Subsidiaries') management pursuant to any management
equity subscription agreement or stock option agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $250,000 in any twelve-month period and no
Default or Event of Default shall have occurred and be continuing immediately
after such transaction; (vi) Permitted Payments; (vii) the Distribution and
(viii) in the event the Company is converted into an entity that is not subject
to income taxation by a government authority, the payment of dividends to
reimburse holders of the Company's equity interests for any income taxes owed
and payable to such governmental authority incurred by such holders solely as a
result of their status as holders of the Company's Equity Interests; provided
that such amounts shall not exceed the tax liability of the Company had it been
subject to corporate income taxation of such governmental authority for the
corresponding period; and provided further that any such payment shall be used
by such holder of the Company's Equity Interests to pay such taxes owed and
payable.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee, such determination to be based upon an opinion or appraisal issued
by an accounting, appraisal or investment banking firm of national standing if
such fair market value exceeds $1.0 million. Not later than the date of making
any Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant "Restricted
Payments" were computed, together with a copy of any fairness opinion or
appraisal required by the Indenture.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock is
issued would have been at least 2.0 to 1; determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period;
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness and letters of credit
pursuant to Credit Facilities; provided that the aggregate principal amount of
all Indebtedness and letters of credit (with letters of credit being deemed to
have a principal amount equal to the maximum potential liability of the Company
and its Subsidiaries thereunder) outstanding under all Credit Facilities after
giving effect to such incurrence does not exceed the greater of (x) $55.0
million less the aggregate amount of all Net Proceeds of Asset Sales applied to
repay Indebtedness under a Credit Facility and reduce lending commitments with
respect thereto pursuant to the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales" and (y) the Borrowing Base as
of the date of any such incurrence;
61
(ii) the incurrence by the Company and the Guarantors of the Existing
Indebtedness;
(iii) the incurrence by the Company and the Guarantors of up to $75.0 million
in aggregate principal amount of Notes and the issuance of the Exchange Notes;
(iv) the incurrence by the Company or any of its Subsidiaries of additional
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount at any one time outstanding under
this clause (iv), including all Permitted Refinancing Indebtedness incurred to
refund, refinance or replace any Indebtedness incurred pursuant to this clause
(iv), not to exceed $3.0 million;
(v) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are used
to refund, refinance or replace Indebtedness (other than intercompany
Indebtedness) that was permitted by the Indenture to be incurred under the
first paragraph hereof or clauses (iii), (iv) or (v) of this paragraph;
(vi) the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Indebtedness that is permitted by
the terms of this Indenture to be outstanding;
(vii) the guarantee by the Company or any Guarantor of Indebtedness of the
Company or a Subsidiary of the Company that was permitted to be incurred by
another provision of this covenant;
(viii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Subsidiaries (other than Receivables Subsidiaries) or any of the
Guarantors; provided, however, that (i) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior payment
in full in cash of all Obligations with respect to the Notes and (ii)(A) any
subsequent issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than the Company or a Wholly-Owned
Subsidiary thereof (other than a Receivables Subsidiary) or a Guarantor and (B)
any sale or other transfer of any such Indebtedness to a Person that is not
either the Company or a Wholly-Owned Subsidiary thereof (other than a
Receivables Subsidiary) or a Guarantor shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be, that was not permitted by this clause (viii);
(ix) the incurrence by the Company or any of its Subsidiaries of Indebtedness
incurred in respect of performance, surety and similar bonds provided by the
Company or any of its Subsidiaries in the ordinary course of business;
(x) the incurrence by the Company or any of its Subsidiaries of Indebtedness
in respect of letters of credit relating to workers' compensation claims and
self-insurance or similar requirements in the ordinary course of business;
(xi) the incurrence of Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
guarantees or letters of credit, surety bonds or performance bonds securing any
such obligations of the Company or any such Subsidiary pursuant to such
agreements, in each case incurred in connection with the disposition of any
business, assets or Subsidiary of the Company, other than Guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such acquisition,
provided that none of the foregoing results in Indebtedness required to be
reflected as indebtedness on the balance sheet of the Company, or any such
Subsidiary in accordance with GAAP and the maximum aggregate liability in
respect of all such Indebtedness shall at no time exceed 100% of the gross
proceeds actually received by the Company and its Subsidiaries in connection
with such disposition; and
62
(xii) the incurrence by the Company or any of its Subsidiaries of additional
Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (xii), not to exceed $3.0 million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (xii) above or is entitled
to be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify (or later reclassify, but only among
clauses (i) through (xii) of the definition of Permitted Debt) such item of
Indebtedness in any manner that complies with this covenant. Accrual of
interest, accretion or amortization of original issue discount, the payment of
interest on any Indebtedness in the form of additional Indebtedness with the
same terms, and the payment of dividends on Disqualified Stock in the form of
additional shares of the same class of Disqualified Stock will not be deemed to
be an incurrence of Indebtedness or an issuance of Disqualified Stock for
purposes of this covenant; provided, in each such case, that the amount thereof
is included in Fixed Charges of the Company as accrued. The Company shall not
be deemed to be in breach of this covenant solely as the result of fluctuations
in currency exchange rates or as a result of changes in accounting principles
that become effective after the date of the Indenture.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien securing Indebtedness or trade payables on any asset now owned
or hereafter acquired, or any income or profits therefrom or assign or convey
any right to receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital
Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Subsidiaries, (ii) make loans or advances to the Company or any of
its Subsidiaries or (iii) transfer any of its properties or assets to the
Company or any of its Subsidiaries. However, the foregoing restrictions will
not apply to encumbrances or restrictions existing under or by reason of (a)
the New Credit Facility as in effect as of the date of the Indenture, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than those
contained in the New Credit Facility as in effect on the date of the Indenture,
(b) the Indenture and the Notes, (c) applicable law, (d) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Indebtedness, such Indebtedness was permitted by the terms
of the Indenture to be incurred, (e) customary non-assignment provisions in
leases entered into in the ordinary course of business and consistent with past
practices, (f) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (g) any agreement for the sale of a
Subsidiary that restricts distributions by that Subsidiary pending its sale,
(h) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Indebtedness
are no more restrictive, taken as a whole, than those contained in the
agreements governing the Indebtedness being refinanced, (i) secured
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenant described above under the caption "--Liens" that limits the right
of
63
the debtor to dispose of the assets securing such Indebtedness, (j) provisions
with respect to the disposition or distribution of assets or property in joint
venture agreements and other similar agreements entered into in the ordinary
course of business, and (k) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary course of
business.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Subsidiary of the Company, the Company
or the entity or Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
" Incurrence of Indebtedness and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Subsidiary than those that would have been obtained in
a comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm of national standing. Notwithstanding the foregoing,
the following items shall not be deemed to be Affiliate Transactions: (i) any
employment agreement or arrangement entered into by the Company or any of its
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Subsidiary, (ii) transactions between or among
the Company and/or its Subsidiaries, (iii) payment of reasonable directors fees
to Persons who are not otherwise Affiliates of the Company, (iv) Restricted
Payments that are permitted by the provisions of the Indenture described above
under the caption "--Restricted Payments," (v) the Distribution, (vi) Permitted
Payments, (vii) reasonable and customary indemnification of any officer,
director or employee of the Company or any of its Subsidiaries in accordance
with any applicable law, and (viii) the conversion of the Company into an
entity which is not subject to income taxation by a governmental authority.
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Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, enter into any sale and leaseback transaction; provided
that the Company may enter into a sale and leaseback transaction if (i) the
Company could have (a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such
Indebtedness pursuant to the covenant described above under the caption "--
Liens," (ii) the gross cash proceeds of such sale and leaseback transaction are
at least equal to the fair market value (as determined in good faith by the
Board of Directors and set forth in an Officers' Certificate delivered to the
Trustee) of the property that is the subject of such sale and leaseback
transaction and (iii) the transfer of assets in such sale and leaseback
transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"--Optional Redemption--Asset Sales."
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Subsidiaries shall
acquire or create another Domestic Subsidiary after the date of the Indenture,
or if any current or future Subsidiary becomes a Domestic Subsidiary of the
Company after the date of the Indenture, then such newly acquired or created
Subsidiary shall become a Guarantor and execute a Supplemental Indenture and
deliver an Opinion of Counsel, in accordance with the terms of the Indenture;
provided that this provision shall not be applicable to a Subsidiary that has
been properly designated as a Receivables Subsidiary.
No Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes, and (ii) no Guarantor will incur,
create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to the Senior
Guarantees and senior in any respect in right of payment to the Subsidiary
Guarantees.
Payments for Consent
The Indenture provides that neither the Company nor any of its Subsidiaries
will, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders of the Notes that consent, waive or agree
to amend in the time frame set forth in the solicitation documents relating to
such consent, waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding and commencing with information relating to
the fiscal quarter ended July 31, 1998, the Company will furnish to the Holders
of Notes (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports, in each case within the time periods specified
in the Commission's rules and regulations. In addition, following the
consummation of the Exchange Offer, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the
65
Commission for public availability within the time periods specified in the
Commission's rules and regulations (unless the Commission will not accept such
a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the Guarantors
have agreed that, for so long as any Notes remain outstanding, they will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act. The Company and the Guarantors shall at
all times comply with Section 314(a) of the Trust Indenture Act of 1939, as
amended.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the subordination provisions of the Indenture); (iii) failure by the Company or
any of its Subsidiaries to comply with the provisions described under the
captions "--Change of Control," "--Asset Sales," "--Restricted Payments" or "--
Incurrence of Indebtedness and Issuance of Preferred Stock," (iv) failure by
the Company or any of its Subsidiaries for 60 days after notice to comply with
any of its other agreements in the Indenture or the Notes; (v) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Subsidiaries (or the payment of which is guaranteed
by the Company or any of its Subsidiaries) whether such Indebtedness or
guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor, or
any Person acing on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and (viii) certain events of
bankruptcy or insolvency with respect to the Company or any of its
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Significant Subsidiary or any
group of Subsidiaries that, taken together, would constitute a Significant
Subsidiary, all outstanding Notes will become due and payable without further
action or notice. Holders of the Notes may not enforce the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to June
1, 2003 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to June 1, 2003 then the premium specified
66
in the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company or
any Guarantor , as such, shall have any liability for any obligations of the
Company or any Guarantor under the Notes, the Indenture or the Registration
Rights Agreement or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages
on the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to
67
the Trustee confirming that the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture. The
Registrar and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require a
Holder to pay any taxes and fees required by law or permitted by the Indenture.
The Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders
of at least a majority in aggregate principal amount of the Notes and a waiver
of the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders") or (viii) make any
change in the foregoing amendment and waiver provisions. In addition, any
amendment to the provisions of Article 10 of the Indenture (which relate to
68
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of Holders of Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets, to make any change that would provide any additional rights or
benefits to the Holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such Holder, or to comply with requirements
of the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Coyne International
Enterprises Corp., 140 Cortland Avenue, Syracuse New York 13221, Attention:
Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
The Initial Notes are represented by one Note in registered, global form
without interest coupons(the "Initial Global Note"). The Exchange Notes
initially will be represented by one or more Notes in registered, global form
without interest coupons (collectively, the "Exchange Global Notes" and,
together with the Initial Global Note, the "Global Notes"). The Global Notes
are deposited upon issuance with the Trustee as custodian for The Depository
Trust Company ("DTC"), in New York, New York, and registered in the name of
DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Notes for Certificated Notes." Except in
the limited circumstances described below, owners of beneficial interests in
the Global Notes will not be entitled to receive physical delivery of
Certificated Notes (as defined below).
Transfers of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
69
Initially, the Trustee will act as Paying Agent and Registrar. The Notes may
be presented for registration of transfer and exchange at the offices of the
Registrar.
DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC and are subject to changes by DTC from
time to time. The Company takes no responsibility for these operations and
procedures and urges investors to contact DTC or their participants directly
to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Exchange Global Notes, DTC will credit the
accounts of Participants with portions of the principal amount of the Exchange
Global Notes equal to the principal amount of the Initial Notes tendered in
the Exchange Offer and (ii) ownership of such interests in the Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners
of beneficial interest in the Exchange Global Notes).
All interests in a Global Note may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer beneficial interests in a Global Note to
such persons will be limited to that extent. Because DTC can act only on
behalf of Participants, which in turn act on behalf of Indirect Participants
and certain banks, the ability of a person having beneficial interests in a
Global Note to pledge such interests to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered Holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interest in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in the
70
principal amount of beneficial interest in the relevant security as shown on
the records of DTC unless DTC has reason to believe it will not receive payment
on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Trustee or the Company. Neither the Company nor the Trustee will be
liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the Notes, and the Company and the Trustee may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Interest in the Exchange Global Notes are expected to be eligible to trade in
DTC's Same-Day Funds Settlement System and secondary market trading activity in
such interests will, therefore, settle in immediately available funds, subject
in all cases to the rules and procedures of DTC and its Participants. See "--
Same Day Settlement and Payment." Transfers between Participants in DTC will be
effected in accordance with DTC's procedures, and will be settled in same day
funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Notes and only in
respect of such portion of the aggregate principal amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form, and
to distribute such Notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Participants,it is under no obligation
to perform or to continue to perform such procedures, and such procedures may
be discontinued at any time. Neither the Company nor the Trustee nor any of
their respective agents will have any responsibility for the performance by DTC
or its respective Participants or Indirect Participants of their respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered certificated
form ("Certificated Notes") if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as depositary for the Global Notes and the
Company thereupon fails to appoint a successor depositary or (y) has ceased to
be a clearing agency registered under the Exchange Act, (ii) the Company, at
its option, notifies the Trustee in writing that it elects to cause the
issuance of the Certificated Notes or (iii) there shall have occurred and be
continuing an Event of Default with respect to the Notes. In addition,
beneficial interests in a Global Note may be exchanged for Certificated Notes
upon request but only upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests therein
will be registered in the names, and issued in any approved denominations,
requested by or on behalf of the depositary (in accordance with its customary
procedures).
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that principal, premium, if any, and interest and
Liquidated Damages on the Notes will be payable at the office or agency of the
Company maintained for such purpose within the City and State of New York or,
at the option of the Company, payment of interest and Liquidated Damages may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of Notes; provided that all payments of
principal, premium, interest and Liquidated Damages with respect to Notes the
Holders of which have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. The Notes represented by the Global
Notes are expected to be eligible to trade in the PORTAL market and to trade in
the Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Notes will also be settled in
immediately available funds.
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Because of time zone differences, the securities account of a Euroclear
System ("Euroclear") or Cedel S.A. ("Cedel") participant purchasing an interest
in a Global Note from a Participant in DTC will be credited, and any such
crediting will be reported to the relevant Euroclear or Cedel participant,
during the securities settlement processing day (which must be a business day
for Euroclear and Cedel) immediately following the settlement date of DTC. DTC
has advised the Company that cash received in Euroclear or Cedel as a result of
sales of interests in a Global Note by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or Cedel
cash account only as of the business day for Euroclear or Cedel following DTC's
settlement date.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Holders of the Exchange Notes are not entitled to any registration rights
with respect to the Exchange Notes.
The Company and the Initial Purchasers entered into the Registration Rights
Agreement. Pursuant to the Registration Rights Agreement, the Company agreed to
file with the Commission the Exchange Offer Registration Statement on the
appropriate form under the Securities Act with respect to the Exchange Notes.
The Registration Statement of which this Prospectus forms a part constitutes
the Exchange Offer Registration Statement. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the Holders of
Transfer Restricted Securities pursuant to the Exchange Offer who are able to
make certain representations the opportunity to exchange their Transfer
Restricted Securities for Exchange Notes. If (i) the Company is not required to
file the Exchange Offer Registration Statement or permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
the Company prior to the 20th day following consummation of the Exchange Offer
that (A) it is prohibited by law or Commission policy from participating in the
Exchange Offer or (B) that it may not resell the Exchange Notes acquired by it
in the Exchange Offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales or (C) that it is a broker-dealer and
owns Initial Notes acquired directly from the Company or an affiliate of the
Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Initial Notes by the Holders thereof who
satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. The Company will use its best
efforts to cause the applicable registration statement to be declared effective
as promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Initial Note until (i) the date on
which such Note has been exchanged by a person other than a broker-dealer for
an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of an Initial Note for an Exchange Note,
the date on which such Exchange Note is sold to a purchaser who receives from
such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (iii) the
date on which such Initial Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Note is distributed to the public
pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 45
days after the Closing Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 135 days after the Closing Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all
Initial Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 30 days after such filing obligation arises and to cause the Shelf
Registration to be declared effective by the Commission on or prior to 90 days
after such obligation arises. If (a) the Company fails to file any of the
Registration Statements required by the Registration
72
Rights Agreement on or before the date specified for such filing, (b) any of
such Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), or (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then the Company will pay "Liquidated Damages" to each
Holder of Initial Notes, with respect to the first 90-day period immediately
following the occurrence of the first Registration Default in an amount equal
to $.05 per week per $1,000 principal amount of Initial Notes held by such
Holder. The amount of the Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of Initial Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages for all Registration Defaults of $.30
per week per $1,000 principal amount of Notes. All accrued Liquidated Damages
will be paid by the Company on each Damages Payment Date to the Global Note
Holder by wire transfer of immediately available funds or by federal funds
check and to Holders of Certificated Securities by wire transfer to the
accounts specified by them or by mailing checks to their registered addresses
if no such accounts have been specified. Following the cure of all Registration
Defaults, the accrual of Liquidated Damages will cease.
Holders of Initial Notes will be required to make certain representations to
the Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than a sale or lease of inventory in the ordinary course of
business consistent with past practices (provided that the sale, lease,
conveyance or other disposition of all or substantially all of the assets of
the Company and its Subsidiaries taken as a whole will be governed by the
provisions of the Indenture described above under the caption "--Change of
Control" and/or the provisions described above under the caption "--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset Sale
covenant), and (ii) the issue or sale by the Company or any of its Subsidiaries
of Equity Interests
73
of any of the Company's Subsidiaries, in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following items
shall not be deemed to be Asset Sales: (i) a transfer of assets (whether by
sale, lease, conveyance, other disposition, merger, consolidation, division or
otherwise) by the Company to a Wholly Owned Subsidiary (other than a
Receivables Subsidiary) or a Guarantor by a Subsidiary to the Company or to a
Wholly Owned Subsidiary (other than a Receivables Subsidiary) or a Guarantor,
(ii) an issuance of Equity Interests by a Wholly Owned Subsidiary to the
Company or to another Wholly Owned Subsidiary, (iii) a Restricted Payment that
is permitted by the covenant described above under the caption "--Restricted
Payments;" (iv) the sale to a Receivables Subsidiary of accounts receivables
and related assets that are customarily transferred in an asset securitization
transaction; and (v) the sale of up to $2.0 million of assets since the date of
the Indenture. A transfer of assets by the Company or a Wholly-Owned Subsidiary
(other than a Receivables Subsidiary) of the Company to a Person other than the
Company or another Wholly Owned Subsidiary (other than a Receivables
Subsidiary), shall be deemed an Asset Sale only to the extent of the percentage
of the Equity Interests in the transferee that are owned by Persons other than
the Company or Wholly Owned Subsidiaries (other than a Receivables Subsidiary)
of the Company.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Borrowing Base" means, as of any date, an amount equal to the sum of (a)
85.0% of the face amount of all accounts receivable owned by the Company and
the Guarantors as of such date that are not more than 90 days past due and (b)
50.0% of the book value of all inventory owned by the Company and the
Guarantors as of such date, all calculated on a consolidated basis and in
accordance with GAAP. To the extent that information is not available as to the
amount of accounts receivable or inventory as of a specific date, the Company
may utilize the most recent available information for purposes of calculating
the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance
with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock, (ii)
in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued or
directly and fully guaranteed or insured by the United States government or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States is pledged in support thereof) having maturities of not more
than six months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any lender party to the New Credit
Facility or with any domestic commercial bank having capital and surplus in
excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition and (vi) money
market funds at least 95% of the assets of which constitute Cash Equivalents of
the kinds described in clauses (i)-(v) of this definition.
74
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange
Act) other than a Principal or a Related Party of a Principal, (ii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above),
other than the Principals and their Related Parties, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a
subsequent condition), directly or indirectly, of more than 50% of the Voting
Stock of the Company (measured by voting power rather than number of shares),
(iii) the consummation of the first transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above) becomes the "beneficial owner" (as defined above), directly or
indirectly, of more of the Voting Stock of the Company (measured by voting
power rather than number of shares) than is at the time "beneficially owned"
(as defined above) by the Principals and their Related Parties in the aggregate
or (iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale or the disposition of securities held by such Person and its
Subsidiaries (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance costs
and original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, imputed interest with respect to
Attributable Debt, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such period
to the extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income, minus (v) non-cash
items increasing such Consolidated Net Income for such period, in each case, on
a consolidated basis and determined in accordance with GAAP. Notwithstanding
the foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash expenses of, a Subsidiary of
the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent that a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Subsidiary without prior governmental approval (that has not been obtained),
and without direct or indirect restriction pursuant to the terms of its charter
and all agreements, instruments, judgments, decrees, orders, statutes, rules
and governmental regulations applicable to that Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be included
only to the extent of the amount of dividends or distributions paid in cash to
the referent Person or a Wholly Owned Subsidiary thereof that is a Guarantor,
(ii) the Net Income of any Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Subsidiary
of that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms
75
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such preferred stock, less (x) all write-ups
(other than write-ups resulting from foreign currency translations and write-
ups of tangible assets of a going concern business made within 12 months after
the acquisition of such business) subsequent to the date of the Indenture in
the book value of any asset owned by such Person or a consolidated Subsidiary
of such Person, (y) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Subsidiaries (except, in each case,
Permitted Investments), and (z) all unamortized debt discount and expense and
unamortized deferred charges as of such date, all of the foregoing determined
in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Credit Facility) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time. Indebtedness
under Credit Facilities outstanding on the date on which Notes are first issued
and authenticated under the Indenture shall be deemed to have been incurred on
such date in reliance on the exception provided by clause (i) the definition of
Permitted Debt.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the New
Credit Facility (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is $10.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of
a Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such
repurchase or redemption complies with the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Distribution" means the payment of amounts aggregating no more than $19.0
million to Capital Resources Lenders II and Exeter Venture Lenders in
connection with the purchase of certain warrants of the Company, certain of
which payments may occur as much as two years after the closing of the
Offering.
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"Domestic Subsidiary" means, with respect to the Company, any Subsidiary of
the Company that was formed under the laws of the United States of America or
that Guarantee or otherwise provides credit support for any Indebtedness of the
Company.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, imputed interest with respect to Attributable Debt,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest of such Person and
its Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Subsidiaries or secured by a Lien on assets of such Person
or one of its Subsidiaries (whether or not such Guarantee or Lien is called
upon) and (iv) the product of (a) all dividend payments, whether or not in
cash, on any series of preferred stock of such Person or any of its
Subsidiaries, other than dividend payments on Equity Interests payable solely
in Equity Interests of the Company (other than Disqualified Stock) or to the
Company or a Subsidiary of the Company, times (b) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
referent Person or any of its Subsidiaries incurs, assumes, Guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by the Company or any of its
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, and (iii) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but only to the
extent that the obligations giving rise to such Fixed Charges will not be
obligations of the referent Person or any of its Subsidiaries following the
Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
77
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Guarantors" means each of (i) Blue Ridge Textile Manufacturing, Inc., Clean
Towel Service, Inc., Ohio Garment Rental, Inc. and Midway--CTS Buffalo, Ltd.,
and (ii) any other Subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the Indenture, and their respective
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted amount
thereof, in the case of any Indebtedness issued with original issue discount,
and (ii) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of such
Person, determined in accordance with GAAP and before any reduction in respect
of preferred stock dividends, excluding, however, (i) any gain (but not loss),
together with any related provision for taxes on such gain (but not loss),
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (ii) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
78
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-
cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than under a Credit Facility) secured by a Lien on the asset or assets
that were the subject of such Asset Sale and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP.
"New Credit Facility" means that certain Credit Facility, dated as of June
26, 1998, by and among the Company and NationsBank, N.A. and the other lenders
party thereto, providing for up to $25.0 million of secured revolving credit
borrowings and up to $30.0 million of secured term debt, including any related
notes, guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business conducted by the Company or any of
its Subsidiaries as of the date hereof and any business reasonably related or
incidental thereto.
"Permitted Investments" means (a) any Investment in the Company or in a
Subsidiary of the Company that is a Guarantor; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Subsidiary of the Company
in a Person, if as a result of such Investment (i) such Person becomes a
Subsidiary of the Company and a Guarantor or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Subsidiary of the
Company that is a Guarantor; (d) any Investment made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales;" (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; (f) any Investment by the Company or a Subsidiary of the
Company in a Receivables Subsidiary or any Investment by a Receivables
Subsidiary in any other Person or assets in connection with a Qualified
Receivables Transaction; provided that any Investment in any such Person is in
the form of a Purchase Money Note, an equity interest or interests in accounts
receivables generated by the Company or a Subsidiary of the Company and
transferred to any Person in connection with a Qualified Receivables
Transaction or any such Person owning such accounts receivables; (g) repurchase
of the Notes; (h) Investments by the Company and its Subsidiaries outstanding
on the date of the Indenture; and (i) other Investments in any Person having an
aggregate fair market value (measured on the date each such Investment was made
and without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (i) that are at the
time outstanding, not to exceed $1.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or any
Guarantor or debt securities that are subordinated to all Senior Debt (and any
debt securities issued in exchange for Senior Debt) to substantially the same
extent as, or to a greater extent than, the Notes are subordinated to Senior
Debt pursuant to Article 10 of the Indenture.
"Permitted Liens" means (i) Liens existing on the date of the Indenture; (ii)
Liens securing Senior Debt that was permitted to be incurred under the
Indenture; (iii) Liens securing Permitted Refinancing Indebtedness that was
incurred to refinance any Indebtedness that had been secured by a Lien
permitted under the Indenture and that was incurred in accordance with the
provisions of the Indenture, provided, however, that such Liens (a) are not
materially less favorable to the Holders and are not materially more favorable
to the lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being refinanced and (b) do not extend to or
79
cover any property or assets of the Company or any of its Subsidiaries not
securing the Indebtedness so refinanced; (iv) Liens securing the Notes; (v)
Liens securing Indebtedness of a Person existing at the time such Person
becomes a Subsidiary, provided that such Liens were in existence prior to the
contemplation of such acquisition, merger or consolidation, were not incurred
in anticipation thereof, and do not extend to any other assets; (vi) Liens
incurred in the ordinary course of business of the Company or any Subsidiary of
the Company with respect to obligations that do not exceed $5.0 million at any
time outstanding and that are not incurred in connection with the borrowing of
money or obtaining advances or credit (other than trade credit incurred in the
ordinary course of business); (vii) Liens imposed by governmental authorities
for taxes, assessments or other charges or claims either (a) not delinquent or
(b) contested in good faith by appropriate proceedings and as to which the
Company or any of its Subsidiaries shall have set aside on its books such
reserves as may be required pursuant to GAAP; (viii) statutory Liens of
landlords, carriers, warehousemen, mechanics, suppliers, materialmen, repairmen
and other like Liens arising by operation of law in the ordinary course of
business for sums not yet delinquent or being contested in good faith, if such
reserves or other appropriate provisions, if any, as shall be required by GAAP
shall have been made in respect thereof; (ix) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security or similar
obligations, including any Lien securing letters of credit issued in the
ordinary course of business in connection therewith, or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, performance and return-of-money bonds and other
similar obligations (exclusive of obligations for the payment of borrowed
money) incurred in the ordinary course of business; (x) judgment Liens not
giving rise to an Event of Default so long as such Lien is adequately bonded
and any appropriate legal proceedings which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have expired;
(xi) easements, rights-of-way, zoning restrictions, minor defects or
irregularities with title and other similar charges or encumbrances in respect
of real property not materially detracting from the value of the property
subject thereto and not interfering in any material respect with the ordinary
conduct of business of the Company or any of its Subsidiaries; (xii) Liens upon
specific items of inventory or other goods and proceeds of any Person securing
such person's obligations in respect of banker's acceptance issued or created
for the account of such Person to facilitate the purchase, shipment or storage
of such inventory or other goods in the ordinary course of business; (xiii)
Liens in favor of the Company or a Guarantor; (xiv) leases or subleases granted
to others not interfering in any material respects with the business of the
Company or its Subsidiaries; (xv) Liens arising out of consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Subsidiaries in the ordinary course of business.
"Permitted Payments" means payments to repurchase Equity Interests of the
Company in order to satisfy certain estate planning obligations of the estate
of J. Stanley Coyne, which payments will not exceed $1.0 million in each of the
second, third, fourth, fifth and sixth calendar years following the death of J.
Stanley Coyne and $2.25 million in each of the seventh, eighth, ninth and tenth
calendar years following the death of J. Stanley Coyne, plus an additional
amount of $2.0 million in the calendar year 2003; provided that no such payment
shall be made prior to the death of J. Stanley Coyne; and provided further,
that the maximum amount of Permitted Payments in a specified calendar year
following the death of J. Stanley Coyne shall be increased by an amount equal
to the difference between the maximum amount of Permitted Payments that could
have been made by the Company in each of the prior specified calendar years
following the death of J. Stanley Coyne and the actual amount of Permitted
Payments made by the Company in each of such prior specified calendar years
following the death of J. Stanley Coyne.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company or
any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Subsidiaries (other than intercompany
Indebtedness); provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable), plus accrued interest
on, the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of reasonable expenses incurred in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a final maturity
80
date later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary who is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Principals" means J. Stanley Coyne and Thomas M. Coyne.
"Purchase Money Note" means a promissory note evidencing a line of credit,
which may be irrevocable, from, or evidencing other Indebtedness owed to, the
Company or any Subsidiary of the Company in connection with a Qualified
Receivables Transaction, which note shall be repaid from cash available to the
maker of such note, other than amounts required to be established as reserves
pursuant to agreements, amounts paid to investors in respect of interest,
principal and other amounts owing to such investors and amounts paid in
connection with the purchase of newly generated receivables.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any Subsidiary of the
Company pursuant to which the Company or any Subsidiary of the Company may
sell, convey or otherwise transfer to (a) a Receivables Subsidiary (in the case
of a transfer by the Company or any Subsidiary of the Company) and (b) any
other Person (in the case of a transfer by a Receivables Subsidiary), or may
grant a security interest in, any accounts receivables (whether now existing or
arising in the future) of the Company or any Subsidiary of the Company, and any
assets related thereto including, without limitation, all collateral securing
such accounts receivables, all contracts and all guarantees or other
obligations in respect of such accounts receivables, proceeds of such accounts
receivable and other assets that are customarily transferred, or in respect of
which security interests are customarily granted, in connection with asset
securitization transactions involving accounts receivable.
"Receivables Subsidiary" means a Wholly Owned Subsidiary of the Company that
engages in no activities other than in connection with the financing of
accounts receivable and that is designated by the Board of Directors of the
Company (as provided below) as a Receivables Subsidiary (a) no portion of the
Indebtedness or any other Obligations (contingent or otherwise) of which (i) is
guaranteed by the Company or any other Subsidiary of the Company (excluding
guarantees of Obligations (other than the principal of, and interest on,
Indebtedness)) pursuant to Standard Securitization Undertakings, (ii) is
recourse to or obligates the Company or any other Subsidiary of the Company in
any way other than pursuant to Standard Securitization Undertakings or (iii)
subjects any property or asset of the Company or any other Subsidiary of the
Company, directly or indirectly, contingently or otherwise, to the satisfaction
thereof, other than pursuant to Standard Securitization Undertakings, (b) with
which neither the Company nor any other Subsidiary of the Company has any
material contract, agreement, arrangement or undertaking (except in connection
with a Purchase Money Note or Qualified Receivables Transaction) other than on
terms no less favorable to the Company or such other Subsidiary than those that
might be obtained at the time from persons that are not Affiliates of the
Company, other than fees payable in the ordinary course of business in
connection with servicing accounts receivables, and (c) to which neither the
Company nor any other Subsidiary of the Company has any obligation to maintain
or preserve such entity's financial condition or cause such entity to achieve
certain levels of operating results. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of the Board of Directors of the
Company giving effect to such designation and an Officers' Certificate
certifying, to the best of such officer's knowledge and belief after consulting
with counsel, that such designation complied with the foregoing conditions.
"Related Party" with respect to any Principal means (i) any controlling
stockholder, 80% (or more) owned Subsidiary, or spouse, ex-spouse, immediate
family member or lineal descendant (in the case of an individual)
81
of such Principal or (ii) any trust, corporation, partnership or other entity,
the beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of such Principal
and/or such other Persons referred to in the immediately preceding clause (i).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Senior Debt" means (i) all Indebtedness outstanding under Credit Facilities
and all Hedging Obligations with respect thereto, (ii) any other Indebtedness
permitted to be incurred by the Company under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Notes or the Subsidiary Guarantees and (iii) all Obligations with respect to
the foregoing. Notwithstanding anything to the contrary in the foregoing,
Senior Debt will not include (w) any liability for federal, state, local or
other taxes owed or owing by the Company, (x) any Indebtedness of the Company
to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z)
any Indebtedness that is incurred in violation of the Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company that are reasonably customary in an accounts receivable transaction.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary (other than a
Receivables Subsidiary) of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Subsidiaries (other than a Receivables Subsidiary) of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
82
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary
view, and no ruling from the Service has been or will be sought. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conditions set forth herein. Any such
changes or interpretations may or may not be retroactive and could affect the
tax consequences to holders. Certain holders (including insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. The Company
recommends that each holder consult such holder's own tax advisor as to the
particular tax consequences of exchanging such holder's Initial Notes for
Exchange Notes, including the applicability and effect of any state, local or
foreign tax laws.
The exchange of the Initial Notes for Exchange Notes pursuant to the Exchange
Offer will not be treated as an "exchange" for federal income tax purposes
because the Exchange Notes should not be considered to differ materially in
kind or extent from the Initial Notes. Rather, the Exchange Notes received by a
holder will be treated as a continuation of the Initial Notes in the hands of
such holder. As a result there will be no federal income tax consequences to
holders exchanging Initial Notes for Exchange Notes pursuant to the Exchange
Offer. If, however, the exchange of Initial Notes for Exchange Notes were
treated as an "exchange" for federal income tax purposes, such exchange should
constitute a recapitalization for federal income tax purposes. Holders
exchanging Initial Notes for Exchange Notes pursuant to such recapitalization
should not recognize any gain or loss upon the exchange.
83
PLAN OF DISTRIBUTION
The Exchange Notes will be offered by the Company to the holders of the
Initial Notes in exchange for the Initial Notes pursuant to the Exchange
Offer.
Except as described below, a broker-dealer may not participate in the
Exchange Offer in connection with a distribution of the Exchange Notes. Each
Participating Broker-Dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Initial Notes where such Notes were acquired as
a result of market-making activities or other trading activities. Subject to
the exception described in the next paragraph, the Company has agreed that for
a period ending on the earlier of (i) 180 days from the date on which the
Exchange Offer Registration Statement is declared effective, and (ii) the date
on which a Participating Broker-Dealer is no longer required to deliver a
prospectus in connection with market making or other trading activities, it
will make this Prospectus available to any Participating Broker-Dealer for use
in connection with any such resale; provided, however, that the Company and
the Guarantors will have no obligation to amend or supplement this Prospectus
unless the Company has received written notice from a Participating Broker-
Dealer of their prospectus delivery requirements under the Securities Act
within fifteen (15) business days following consummation of the Exchange
Offer. In addition, until , 1998, all dealers effecting transactions in
the Exchange Notes may be required to deliver a prospectus.
The Company shall not be required to amend or supplement the Exchange Offer
Registration Statement if (i) in the judgment of the Company's board of
Directors exercised reasonably and in good faith the use of the Exchange Offer
Registration Statement and the disclosure required to be made therein would
materially interfere with a valid business purpose of the Company or the
Guarantors and (ii) the Company delivers a notice to such effect to such
Broker-Dealers setting forth the period of time (which shall not be greater
than 60 days) for which the Company's obligation to so amend or supplement the
Exchange Offer Registration Statement will be suspended.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers and expenses
of counsel for the holders of the Exchange Notes and will indemnify the
holders of the Exchange Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
84
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered by the Company
hereby will be passed upon for the Company by Blank Rome Comisky & McCauley
LLP, Philadelphia, Pennsylvania.
INDEPENDENT AUDITORS
The consolidated balance sheets as of October 31, 1997 and 1996, and the
consolidated statements of operations and retained earnings and cash flows for
each of the three years in the period ended October 31, 1997, included in this
Prospectus and Exchange Offer Registration Statement, have been included herein
in reliance on the report of PricewaterhouseCoopers, LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
85
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF COYNE INTERNATIONAL ENTERPRISES CORP.
AND SUBSIDIARIES
PAGE
----
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of October 31, 1997 and 1996.............. F-3
Consolidated Statements of Operations and Retained Earnings for the years
ended
October 31, 1997, 1996 and 1995......................................... F-4
Consolidated Statements of Cash Flows for the years ended October 31,
1997, 1996 and 1995..................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
Consolidated Balance Sheets as of April 30, 1998 (Unaudited) and as of
October 31, 1997........................................................ F-15
Consolidated Statements of Operations and Retained Earnings (Deficit) for
the six months
ended April 30, 1998 and 1997 (Unaudited)............................... F-16
Consolidated Statements of Cash Flows for the six months ended April 30,
1998 and 1997
(Unaudited)............................................................. F-17
Notes to Consolidated Financial Statements (Unaudited)................... F-18
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Coyne International Enterprises Corp.
We have audited the accompanying consolidated balance sheets of Coyne
International Enterprises Corp. and Subsidiaries as of October 31, 1997 and
1996 and the related consolidated statements of operations and retained
earnings, and cash flows for each of the three years in the period ended
October 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Coyne
International Enterprises Corp. and Subsidiaries as of October 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended October 31, 1997 in conformity
with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Syracuse, New York
December 19, 1997
F-2
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
-------------------------
1997 1996
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,272,192 $ 348,134
Receivables, principally trade.................... 11,957,651 11,385,624
Inventories....................................... 5,131,861 4,744,426
Uniforms and other rental items in service, net... 23,559,751 20,751,447
Prepaid expense and other assets.................. 729,876 1,526,984
------------ -----------
Total current assets.......................... 42,651,331 38,756,615
------------ -----------
Property, plant and equipment, net.................. 41,799,938 43,051,847
Purchased routes and acquisition intangibles, net... 16,549,578 13,179,023
Deferred financing costs, net....................... 745,649 949,528
Deferred income tax................................. 500,000 1,160,545
Other assets........................................ 374,248 334,876
------------ -----------
$102,620,744 $97,432,434
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.............. $ 7,849,570 $ 6,470,035
Bank overdraft.................................... 1,700,982
Accounts payable.................................. 8,318,802 9,656,923
Accrued expenses:
Salaries and employee benefits.................. 3,275,202 1,872,684
Other........................................... 6,122,105 6,468,807
Deferred income taxes............................. 8,615,000 7,681,000
------------ -----------
Total current liabilities..................... 35,881,661 32,149,449
Long-term debt, net of current maturities........... 39,650,469 40,785,444
Subordinated debentures, net of original issue
discount........................................... 11,057,144 10,795,669
Other liabilities................................... 4,391,322 4,113,302
------------ -----------
Total liabilities............................. 90,980,596 87,843,864
------------ -----------
Redeemable common stock warrants.................... 1,743,086 1,743,086
Shareholders' equity:
Preferred stock--5% non-cumulative, non-voting,
callable at par:
Class A--$100 par value; authorized 30,000;
issued and outstanding 23,107.................. 2,310,700 2,310,700
Class B--$500 par value; authorized 5,000;
issued 4,991 and outstanding 2,991............. 2,495,500 2,495,500
Common stock--$.01 par value:
Class A--voting; authorized 100,000; issued and
outstanding 2,923.............................. 29 29
Class B--non-voting; authorized 99,000; issued
and outstanding 74,030......................... 740 740
Additional paid-in capital........................ 849,512 849,512
Retained earnings................................. 5,663,768 3,612,190
------------ -----------
11,320,249 9,268,671
Less:
Cost of 2,000 shares of Class B preferred stock
held in treasury............................... (166,667) (166,667)
Shareholder note receivable..................... (1,256,520) (1,256,520)
------------ -----------
Total shareholders' equity.................... 9,897,062 7,845,484
------------ -----------
Commitments and contingencies
$102,620,744 $97,432,434
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED OCTOBER 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
Revenue:
Rental operations...................... $114,671,684 $111,090,673 $111,225,265
Direct sales........................... 8,263,079 7,994,194 6,542,956
------------ ------------ ------------
122,934,763 119,084,867 117,768,221
------------ ------------ ------------
Operating expenses:
Cost of rental operations.............. 86,985,898 87,721,417 88,789,230
Cost of direct sales................... 5,801,679 5,626,040 4,223,759
Selling, general and administrative.... 19,355,384 17,558,105 17,160,947
------------ ------------ ------------
112,142,961 110,905,562 110,173,936
------------ ------------ ------------
Income from operations............... 10,791,802 8,179,305 7,594,285
Interest expense......................... 6,715,224 6,786,065 6,253,768
------------ ------------ ------------
Income before income taxes........... 4,076,578 1,393,240 1,340,517
Income taxes............................. 2,025,000 847,000 890,000
------------ ------------ ------------
NET INCOME........................... 2,051,578 546,240 450,517
Retained earnings, beginning of year..... 3,612,190 3,065,950 2,615,433
------------ ------------ ------------
RETAINED EARNINGS, END OF YEAR....... $ 5,663,768 $ 3,612,190 $ 3,065,950
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income.......................... $ 2,051,578 $ 546,240 $ 450,517
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property, plant and
equipment......................... 4,147,655 3,688,268 3,377,967
Amortization expense............... 1,140,994 1,090,600 1,037,776
Provision for deferred income
taxes............................. 1,595,000 402,000 315,000
Changes in operating assets and
operating liabilities:
Accounts receivable............... (271,471) 861,707 (766,598)
Inventories....................... (252,128) 66,694 (2,618,312)
Uniforms in service............... (2,808,304) (1,229,739) 2,163,299
Prepaid expenses and other
assets........................... 778,894 825,572 (76,949)
Accounts payable and other
liabilities...................... (107,932) 1,309,126 (1,864,059)
------------ ------------ ------------
Net cash provided by operating
activities...................... 6,274,286 7,560,468 2,018,641
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and
equipment.......................... (1,086,633) (3,938,734) (5,601,927)
Acquisition of business, net of cash
acquired........................... (1,122,101)
------------ ------------ ------------
Net cash used in investing
activities...................... (2,208,734) (3,938,734) (5,601,927)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term borrowings.. 121,565,225 121,377,464 127,460,857
Payments under long-term debt
obligations........................ (126,287,871) (125,293,673) (123,272,756)
Increase in bank overdrafts......... 1,700,982
Deferred financing costs incurred... (119,830) (105,904) (534,565)
------------ ------------ ------------
Net cash (used in) provided by
financing activities............ (3,141,494) (4,022,113) 3,653,536
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ 924,058 (400,379) 70,250
Cash and cash equivalents:
Beginning of year................... 348,134 748,513 678,263
------------ ------------ ------------
End of year...................... $ 1,272,192 $ 348,134 $ 748,513
============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid....................... $ 6,204,883 $ 6,266,669 $ 5,615,797
Income taxes paid................... 514,144 446,873 796,746
Assets acquired under capital lease
obligations........................ 1,497,313 5,883,197 3,189,977
Seller financed debt................ 3,469,893
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description
The Company provides a highly specialized service to businesses of all
types--from small service companies to major corporations that employ
thousands of people. The Company designs and implements corporate identity
uniform programs for its customers in connection with renting or selling its
uniform services to customers and other accessories throughout the eastern
United States. In addition, the Company manufactures shop towels which are
sold throughout the United States.
Principles of Consolidation and Revenue Recognition
The consolidated financial statements include the accounts of Coyne
International Enterprises Corp. and its wholly-owned Subsidiaries (the
Company). All intercompany accounts have been eliminated. The Company
recognizes rental revenues when the services are delivered to customers. The
Company records direct sales upon shipment to the customer.
Fiscal Year
The Company uses a fifty-two/fifty-three week fiscal year ending on the last
Saturday in October. Accordingly, the financial statements are for the 52
weeks ended October 25, 1997 and October 26, 1996 and October 28, 1995. For
convenience, the dating of the accompanying financial statements, and notes
herein, have been labeled as of and for the years ended October 31, 1997, 1996
and 1995 rather than the actual fiscal year end dates.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less, at date of purchase, to be cash equivalents.
Inventories
Inventories represent primarily new garments which are valued at the lower
of average cost or market.
Uniforms and Other Rental Items in Service
Rental garments, mats and towels in service are carried at cost and
amortized on a straight-line basis over their estimated income-producing
lives, ranging principally from 10 to 60 months.
Property, Plant and Equipment
Property, plant and equipment items are recorded at cost with provision for
depreciation by charges to operations on a straight-line basis over their
estimated useful lives which range from fifteen to forty years for buildings
and improvements, three to ten years for machinery and equipment and three to
eight years for vehicles.
F-6
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maintenance and repairs are charged to expense when incurred. Construction in
process consists primarily of capital expenditures for plant renovations and
vehicle re-builds. The Company capitalizes interest during the period of major
construction projects.
Purchased Routes and Acquisition Intangibles
The Company's acquisitions of rental operations and routes have generally
been accounted for by using the purchase method. The purchase method allocates
the amounts paid to the net assets acquired based on their respective fair
values. The amounts paid in excess of fair value of the acquired net assets
and goodwill acquired after October 31, 1970, is amortized on a straight-line
basis over forty years. The Company assesses the recoverability of goodwill by
determining whether the amortization of the goodwill balance over the
remaining life can be recovered through undiscounted future operating cash
flows and reviews for impairment whenever events or changes in circumstances
(i.e. plant closure) indicate that the carrying amount of an asset may not be
fully recoverable.
Routes acquired before October 31, 1970 are carried at a cost of $764,310.
These intangibles are also regularly evaluated and in the opinion of
management have not diminished in value and accordingly have not been
amortized.
The Company has certain contracts with non-compete arrangements which are
charged to operations on a straight-line basis over the periods of the
respective agreements which range from 5 to 10 years.
Deferred Financing Costs
Deferred financing costs incurred in obtaining long-term debt are stated at
cost less accumulated amortization. Amortization of deferred financing costs
is provided using the effective interest write-off method over the term of the
obligation and aggregated $324,000, $327,000 and $286,000 for the years ended
October 31, 1997, 1996 and 1995.
Other Liabilities
The Company, under certain insurance programs, retains portions of expected
losses primarily relating to workers' compensation and employees' medical
insurance. A provision for claims under the self-insured program is recorded
based upon the Company's estimate, after consultation with insurance advisors,
of the aggregate liability for claims incurred.
Advertising Costs
The Company expenses advertising costs as incurred.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable and trade accounts payable
approximates fair value because of the short maturity of these instruments.
The fair value of the Company's long-term debt approximated its carrying value
at October 31, 1997, 1996 and 1995.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return, and where permitted state tax returns. Provisions for deferred taxes
are recognized based on the difference between the financial statement and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse.
F-7
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Recent Accounting Pronouncements
Financial Accounting Standards Board Statement No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," issued in June 1997, and effective for
fiscal years beginning after December 15, 1997, establishes standards for
report and display of comprehensive income and its components in the financial
statements. The adoption of SFAS No. 130 will have no impact on the Company's
consolidated results of operations, financial position or cash flows.
2. ACQUISITIONS
During 1997, the Company acquired certain assets of several industrial
laundries which were accounted for as purchase transactions. The aggregate
purchase price of $4,594,000 consisted of cash of $1,124,000 and notes payable
of $3,470,000 at varying rates of interest and installment payments through
January 2004. The purchase price was allocated to accounts receivable
($300,000) rental garments ($135,000), equipment ($312,000) covenants not to
compete ($763,000), purchased routes ($3,166,000) and liabilities assumed of
($82,000).
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes:
1997 1996
------------ ------------
Land............................................. $ 2,436,218 $ 2,520,658
Buildings and improvements....................... 37,770,291 37,298,632
Machinery and equipment.......................... 36,466,316 40,350,481
Vehicles......................................... 6,187,631 5,030,893
Construction in process.......................... 276,444 1,223,837
------------ ------------
83,136,900 86,424,501
Less accumulated depreciation.................... (41,336,962) (43,372,654)
------------ ------------
$ 41,799,938 $ 43,051,847
============ ============
During 1996 approximately $97,000 of interest costs were capitalized.
Amortization expense on capital leases was approximately $1,469,000, $856,000
and $553,000 in 1997, 1996 and 1995, respectively.
4. PURCHASED ROUTES AND ACQUISITION INTANGIBLES
The following summarizes the individual components of purchased routes and
acquisition intangibles at October 31:
1997 1996
----------- -----------
Goodwill........................................... $ 764,310 $ 764,310
Purchased route.................................... 22,027,074 18,892,293
Covenants not to compete........................... 1,146,916 373,041
----------- -----------
23,938,300 20,029,644
Less: Accumulated amortization..................... (7,388,722) (6,850,621)
----------- -----------
$16,549,578 $13,179,023
=========== ===========
Amortization expense for purchased routes and acquisition intangibles
aggregated $556,000, $510,000 and $593,000 for the years ended October 31,
1997, 1996 and 1995.
F-8
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
As of October 31, long-term debt consists of the following:
1997 1996
----------- -----------
NationsBank, N.A. (Nations) revolver, interest
payable monthly at the Bank's prime rate plus
1.0%.............................................. $13,477,683 $13,000,000
Term loan payable to Nations, with interest due
monthly at the Bank's prime rate plus 1.25%.
Principal payable in quarterly installments of
$925,000 in fiscal year 1998 and $1,012,500 in
1999.............................................. 7,750,000 10,950,000
Term loan payable to Nations, with interest due
monthly at the Bank's prime rate plus 1.5%.
Principal payable upon the earlier of the
expiration of the Revolving Credit Facility, or
the scheduled quarterly installment due dates
commencing January 1, 2000 and maturing in 2002... 10,000,000 10,000,000
Nations acquisition loan facility, interest payable
monthly at the Bank's prime rate plus 1.75%....... 646,617
Capital lease obligations payable in monthly
installments with interest, at rates ranging from
7.4% to 14.8%, payable through 2003, net book
value of capital leases was approximately
$10,344,000 and $6,431,000, respectively.......... 8,514,398 8,763,372
Industrial Development Revenue Bonds payable in
monthly installments with interest, ranging from
72% of prime to prime, through 2005............... 3,289,961 3,562,726
Other debt obligations payable in monthly
installments with interest, at rates ranging from
6% to 10.3%, payable through 2005................. 3,821,380 979,381
----------- -----------
47,500,039 47,255,479
Less current maturities............................ 7,849,570 6,470,035
----------- -----------
$39,650,469 $40,785,444
=========== ===========
Senior subordinated notes payable to Capital
Resource Lenders II (Capital) and Exeter Venture
Lenders (Exeter), net of unamortized debt discount
of $942,856 and $1,204,331 at October 31, 1997 and
1996. Annual interest at 12%, due quarterly.
Principal payable in quarterly installments
commencing September 30, 1999 through maturity
September 30, 2002................................ $11,057,144 $10,795,669
=========== ===========
The prime rate at October 31, 1997 and 1996 was 8.5% and 8.25%,
respectively.
Nations
The term loans and revolving debt payable to Nations are provided for in the
Financing and Security Agreement (the Nations agreement). The revolving credit
under this facility is available through October 1, 1999, with one year
extensions available at the discretion of Nations and is computed based on
eligible accounts receivable and inventory, as defined, not to exceed
$16,000,000 (1996 base was $13,000,000).
The terms of the Nations agreement include various covenants, which provide,
among other things, for the maintenance of certain minimum levels of net worth
and cash flow, limitations on the debt leverage of the Company, and
limitations on capital expenditures.
F-9
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Collateral pledged under the Nations agreement includes all inventory,
accounts receivable, equipment, customer lists, and real property. As
permitted under the agreement, certain equipment and real property is subject
to first security interests in favor of other lenders.
The Nations agreement provides for an Acquisition Loan Facility of up to
$6,000,000. Borrowings under this facility totalled $647,000 at October 31,
1997. There were no borrowings under the facility at October 31, 1996. In
addition, the Nations agreement includes a material adverse change clause
which permits the financial institution to call its debt in the event of a
material adverse change in the business. Management does not anticipate any
such adverse changes in the next twelve-months, however there can be no
assurances.
Capital and Exeter
The senior subordinated notes to Capital and Exeter are provided for in the
Senior Subordinated Note and Warrant Purchase Agreement (the Capital
agreement). The notes are unsecured and may be redeemed in advance of the
scheduled maturity at the option of the Company at par value. Under the terms
of the Capital agreement, mandatory prepayment in full would be required if
certain events of liquidity or public sales of Company stock occurred, as
defined in the agreement.
In connection with the Capital agreement, common stock warrants were issued
to Capital and Exeter to purchase up to 642 shares of the Company's Class A
common stock and up to 16,250 shares of the Company's Class B common stock at
$.01 per share (see Note 7). The estimated fair value of the warrants, at the
date of issuance of $1,743,000, has been recorded as debt discount and is
being amortized over the life of the notes. Amortization expense was
approximately $261,000 in 1997, 1996 and 1995.
The terms of the Capital agreement include various covenants, which provide,
among other things, for the maintenance of certain minimum levels of net worth
and cash flow, limitations on dividend payments, the debt leverage of the
Company, and limitations on capital expenditures.
Industrial Development Revenue Financing
The Company's corporate headquarters, its Buffalo, New York plant and its
Blue Ridge, Georgia plant were financed under separate long-term lease
arrangements with the Industrial Development Agencies of the local counties.
The leases have been accounted for as capital leases. Accordingly, the related
assets are included in the consolidated balance sheet of the Company.
Similarly, an amount equivalent to the principal amount of the Agency's
revenue bonds outstanding related to those properties is included as a
liability. While the bonds are not a debt of the Company, the long-term lease
obligates the Company to payments equal to interest and amortization of such
bonds and provides for the ultimate reversion of the properties to the Company
at the end of the bond agreement.
At October 31, 1997, payments due on all long-term debt arrangements for
each of the next five years and thereafter are as follows:
SENIOR CAPITAL
SUBORDINATED LONG-TERM LEASE
NOTES DEBT OBLIGATIONS
------------ ------------ -----------
1998................................ $ 4,930,356 $ 2,919,214
1999................................ $ 1,200,000 19,085,051 2,617,286
2000................................ 2,400,000 6,744,588 1,774,763
2001................................ 3,600,000 4,746,610 892,529
2002................................ 4,800,000 642,041 168,435
Thereafter.......................... 2,836,995 142,171
------------ ------------ -----------
12,000,000 38,985,641 8,514,398
Less: Unamortized original issue
discount........................... (942,856)
------------ ------------ -----------
$ 11,057,144 $ 38,985,641 $ 8,514,398
============ ============ ===========
F-10
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The components of income tax expense for the years ended October 31, were as
follows:
1997 1996 1995
----------- --------- ---------
Current tax expense:
Federal.................................... $ 245,000 $ 315,000 $ 400,000
State...................................... 185,000 130,000 175,000
----------- --------- ---------
430,000 445,000 575,000
Deferred tax expense......................... 1,595,000 402,000 315,000
----------- --------- ---------
Income tax expense......................... $ 2,025,000 $ 847,000 $ 890,000
=========== ========= =========
A reconciliation of the federal statutory income tax rate and the Company's
effective income tax rate is as follows:
1997 1996 1995
---- ---- ----
Statutory tax rate......................................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit........................ 7.3 10.4 10.5
Non-deductible items....................................... 6.2 16.4 21.9
Other...................................................... 2.2
---- ---- ----
Effective rate........................................... 49.7% 60.8% 66.4%
==== ==== ====
The tax effects of temporary differences that give rise to deferred tax
assets (liabilities) at October 31, were as follows:
1997 1996
------------ ------------
Current:
Rental garments in service.................... $ (9,192,000) $ (8,041,901)
Inventory..................................... 119,000 93,031
Accrued expenses.............................. 458,000 267,870
------------ ------------
Current deferred tax liability.............. (8,615,000) (7,681,000)
------------ ------------
Non-current:
Fixed assets.................................. (3,032,000) (2,594,097)
Deferred compensation......................... 524,000 508,834
Other liabilities............................. 1,170,000 1,046,699
Alternative minimum tax credit carryforward... 1,838,000 1,681,910
Net operating loss carryforward............... 433,186
Investment tax credit carryforward............ 84,013
------------ ------------
Non-current deferred tax asset.............. 500,000 1,160,545
------------ ------------
Net deferred tax liability.................. $ (8,115,000) $ (6,520,455)
============ ============
At October 31, 1997, the Company has alternative minimum tax credit
carryforwards, which are available indefinitely, of $1,838,000 available to
offset future regular federal income tax.
F-11
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. SHAREHOLDERS' EQUITY
Upon the happening of certain events, each Class B common share then issued
and outstanding shall automatically be converted into one Class A common
share. These events are as follows: (a) a disposition of substantially all the
assets of the corporation, (b) transactions in the common stock resulting in
Coyne family ownership being less than 51%, or (c) a public offering of the
Company's common shares.
In connection with the issuance of Senior Subordinated Notes, the
noteholders received warrants to purchase shares of the Company's common stock
(see Note 5). The warrants contain a put option feature whereby the holder has
the right to sell to the Company all of the warrants, at fair market value, as
defined, in equal installments in each of the years ended September 30, 2000
and 2001. Correspondingly, the Company has the right during the year ended
September 30, 2002 to repurchase all of the warrants and or warrant shares at
fair market value, as defined. The Company has not recorded any adjustment to
the established warrant amount as of October 31, 1997 or 1996 as management is
unable to reasonably estimate its future value, if any. Additionally, the
warrants contain antidilution provisions and expire upon the later of the date
of full repayment of the notes, or September 30, 2002.
8. SHAREHOLDER NOTE RECEIVABLE
The Company has an outstanding note receivable from its principal
shareholder in the amount of $1,256,250. This note bears interest at the
Applicable Federal Rate as defined by the Internal Revenue Service, 6.4%
October 31, 1997. Interest income on the note was not recognized in fiscal
1997. The total amount due as of October 31, 1997 approximates $1,336,000.
9. COMMITMENTS AND CONTINGENCIES
The Company and its operations are subject to various federal, state and
local regulations relating to environmental matters, including laws which
require the investigation and, in some cases, remediation of environmental
contamination. The Company's policy is to accrue and charge to operations
environmental investigation and remediation expenses when it is probable that
a liability has been incurred and an amount is reasonably estimable.
Certain claims have been filed or are pending against the Company arising
from the conduct of its business. In the opinion of management, all matters
are without merit and the Company intends to defend such claims vigorously.
Based on information currently available, management believes that the outcome
of any such claims will not have a material adverse effect on its business,
financial condition or results of operations.
10. OPERATING LEASES
The Company has noncancellable operating lease commitments for certain
operating facilities, transportation, manufacturing and office equipment,
which expire at various dates through 2004. Rent expense under operating
leases approximated $2,476,000, $2,649,000 and $3,933,000 during 1997, 1996
and 1995, respectively. Minimum annual rental commitments at October 31, 1997
are as follows:
1998............................................................ $ 1,813,000
1999............................................................ 709,000
2000............................................................ 198,000
2001............................................................ 109,000
2002............................................................ 88,000
Thereafter...................................................... 48,000
-----------
Total minimum lease payments.................................. $ 2,965,000
===========
F-12
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. PENSION PLANS
All full-time nonunion and certain union employees are eligible to
participate in one of three 401(k) plans after one year of service. The
Company matches a portion of the employees' salary reduction contributions and
contributes a base contribution of no less than 3% of eligible participant
compensation. The Company contributions under the 401(k) plan, which vest over
a seven-year employment period, were approximately $680,000, $686,000 and
$482,000 in 1997, 1996 and 1995, respectively. Certain employees of the
Company are covered by union sponsored, collectively bargained, multi-employer
pension plans (Union Plans). The Company charged to expense $1,150,000,
$1,182,000 and $1,169,000 in 1997, 1996 and 1995, for such plans. These
contributions are determined in accordance with the provisions of negotiated
labor contracts and generally are based on the number of hours worked. The
Company may be liable for its share of unfunded vested benefits, if any,
related to the Union Plans. Information from the Union Plans' administrators
is not available to permit the Company to determine its share, if any, of
unfunded vested benefits.
The Company maintains a defined benefit plan for certain employees at one of
its plants. The most recent valuation stated an accumulated plan benefit
obligation of approximately $490,000 and plan assets with a fair market value
of approximately $763,000.
The Company has unfunded deferred compensation agreements with three
individuals. The cost of the plans is being, or has been previously, charged
to income during service periods.
12. RELATED PARTY TRANSACTIONS
The Company has guaranteed the obligations of J. Stanley Coyne, a principal
shareholder of the Company, under a promissory note payable in 2003. At
October 31, 1997, the outstanding balance, including unpaid accrued interest,
approximates $1,711,000.
At the Company's discretion, the Company has made salary continuation
payments totaling $100,000 per year to each of J. Stanley Coyne, a principal
shareholder of the Company, and Gerald Coyne, a son of J. Stanley Coyne,
including payments of such amounts in each of the last three fiscal years. In
addition, the Company has paid certain medical and personal expenses of J.
Stanley Coyne aggregating $73,979, $44,088, and $93,451 during the fiscal
years ended October 31, 1995, 1996, and 1997, respectively.
The Company acquired certain residential property in central New York in
1995 at a cost of $320,000. Thomas M. Coyne, Chairman of the Board and
President of the Company, paid the down payment of $75,000 and the Company
assumed a mortgage of $245,000 payable at $2,900 per month for ten years. The
mortgage bears interest at 7.5%. The Company made mortgage payments of $0,
$15,928, and $18,317 during the fiscal years ended October 31, 1995, 1996, and
1997, respectively. Thomas M. Coyne has an option to acquire this property any
time for the unpaid balance of the mortgage, but in no event less than
$100,000.
F-13
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, OCTOBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................ $ 570,298 $ 1,272,192
Receivables, principally trade................... 13,372,682 11,957,651
Inventories...................................... 6,452,940 5,131,861
Uniforms and other rental items in service, net.. 27,309,696 23,559,751
Prepaid expense and other assets................. 426,175 729,876
------------ ------------
Total current assets......................... 48,131,791 42,651,331
------------ ------------
Property, plant and equipment, net................. 42,643,191 41,799,938
Purchased routes and acquisition intangibles, net.. 16,772,377 16,549,578
Deferred financing costs, net...................... 669,625 745,649
Deferred income tax................................ 1,525,000 500,000
Other assets....................................... 374,255 374,248
------------ ------------
$110,116,239 $102,620,744
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt............. $ 8,799,090 $ 7,849,570
Bank overdraft................................... 1,626,053 1,700,982
Accounts payable................................. 12,233,596 8,318,802
Accrued expenses:
Salaries and employee benefits.................. 3,992,235 3,275,202
Other........................................... 6,203,651 6,122,105
Deferred income taxes............................ 9,850,000 8,615,000
------------ ------------
Total current liabilities.................... 42,704,625 35,881,661
Long-term debt, net of current maturities.......... 38,828,719 39,650,469
Subordinated debentures, net of original issue
discount.......................................... 11,187,882 11,057,144
Other liabilities.................................. 4,408,627 4,391,322
------------ ------------
Total liabilities............................ 97,129,853 90,980,596
------------ ------------
Redeemable common stock warrants................... 19,000,000 1,743,086
------------ ------------
Shareholders' equity:
Preferred stock--5% non-cumulative, non-voting,
callable at par:
Class A--$100 par value; authorized 30,000;
issued and outstanding 23,107................. 2,310,700 2,310,700
Class B--$500 par value; authorized 5,000;
issued 4,991; outstanding 2,991............... 2,495,500 2,495,500
Common stock--$.01 par value:
Class A--voting; authorized 100,000 shares,
issued and outstanding 2,923.................. 29 29
Class B--non-voting; authorized 99,000;
issued and outstanding 74,030................. 740 740
Additional paid-in capital....................... 849,512 849,512
Retained earnings (deficit)...................... (10,246,908) 5,663,768
------------ ------------
(4,590,427) 11,320,249
Less:
Cost of 2,000 shares of Class B preferred stock
held in treasury.............................. (166,667) (166,667)
Shareholder note receivable.................... (1,256,520) (1,256,520)
------------ ------------
Total shareholders' equity (deficit)......... (6,013,614) 9,897,062
------------ ------------
Commitments and contingencies
$110,116,239 $102,620,744
============ ============
See notes to consolidated financial statements.
F-14
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
SIX MONTHS ENDED APRIL
30,
-------------------------
1998 1997
------------ -----------
(UNAUDITED)
Revenue:
Rental operations.................................. $ 62,015,866 $57,038,173
Direct sales....................................... 5,012,343 3,921,123
------------ -----------
67,028,209 60,959,296
------------ -----------
Operating expenses:
Cost of rental operations.......................... 47,110,518 43,480,496
Cost of direct sales............................... 3,742,506 2,742,163
Selling, general and administrative................ 11,196,340 9,665,089
------------ -----------
62,049,364 55,887,748
------------ -----------
Income from operations........................... 4,978,845 5,071,548
------------ -----------
Interest expense including redemption of common stock
warrants in 1998 of $17,256,914..................... 20,652,521 3,409,093
------------ -----------
(Loss) income before income taxes................ (15,673,676) 1,662,455
Income taxes......................................... 237,000 826,240
------------ -----------
NET (LOSS) INCOME ............................... (15,910,676) 836,215
Retained earnings, beginning of the year............. 5,663,768 3,612,190
------------ -----------
RETAINED EARNINGS (DEFICIT), END OF PERIOD....... $(10,246,908) $ 4,448,405
============ ===========
See notes to consolidated financial statements.
F-15
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL
30,
-------------------------
1998 1997
------------ -----------
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income.................................. $(15,910,676) $ 836,198
Adjustments to reconcile net (loss) income to net
cash provided by
operating activities:
Depreciation of plant and equipment.............. 2,107,360 2,050,425
Amortization expense............................. 647,836 545,417
Provision for deferred income taxes.............. 210,000 412,604
Redemption of stock warrants..................... 17,256,914
Changes in operating assets and operating
liabilities:
Accounts receivable............................. (1,415,031) 117,844
Inventories..................................... (1,321,079) (406,215)
Uniforms in service............................. (3,749,945) (169,069)
Prepaid expenses and other assets............... 303,694 655,880
Accounts payable and other liabilities.......... 4,730,686 (888,739)
------------ -----------
Net cash provided by operating activities....... 2,859,759 3,154,345
------------ -----------
Cash flows from investing activities:
Purchases of property, plant and equipment......... (2,950,622) (676,588)
Acquisition of business, net of cash acquired...... (582,975) (6,463)
------------ -----------
Net cash used in investing activities........... (3,533,597) (683,051)
------------ -----------
Cash flows from financing activities:
Proceeds from long-term borrowings................. 75,409,917 58,955,037
Decrease in bank overdrafts........................ (74,929) --
Payments under long-term debt obligations.......... (75,282,146) (60,971,871)
Deferred financing costs incurred.................. (80,898) (55,000)
------------ -----------
Net cash used in financing activities........... (28,056) (2,071,834)
------------ -----------
Net increase (decrease) in cash................. (701,894) 399,460
Cash and cash equivalents:
Beginning of year.................................. 1,272,192 348,134
------------ -----------
End of period...................................... $ 570,298 $ 747,594
============ ===========
F-16
COYNE INTERNATIONAL ENTERPRISES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six-month
period ended April 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended October 31, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto contained
herein.
NOTE B--REDEMPTION OF STOCK WARRANTS
In May 1998 the Company entered into an agreement with its senior
subordinated noteholders to redeem the outstanding common stock warrants for
$19,000,000 comprised of $6,000,000 for the warrants, $11,000,000 for an early
termination fee and $2,000,000 for a management fee. The excess of this
settlement over the book value of the stock warrants has been reported as a
charge of $17,256,000 in the accompanying financial statements.
NOTE C--INCOME TAXES
The Company's effective tax rate differs from the statutory rate of 34% due
to non deductible costs associated with the redemption of the common stock
warrants described in Note B and other non deductible costs.
NOTE D--LONG TERM OBLIGATIONS
The agreement to redeem the outstanding common stock warrants, and the
resulting charge, constituted an event of default under the Company's bank
credit facility and its subordinated notes. On May 29, 1998 the banks and the
subordinated noteholders amended their agreements or waived this default, as
well as certain other covenant violations.
NOTE E--SUBSEQUENT EVENT
On June 26, 1998, pursuant to a purchase agreement dated June 23, 1998, the
Company sold, at par, $75,000,000 of 11 1/4% Senior Subordinated Notes due
2008 ("Notes").The proceeds of the Notes were used primarily to retire certain
existing debt obligations, redeem outstanding redeemable common stock
warrants, and for general corporate purposes. As a result of the transactions,
the Company recognized an extraordinary charge of approximately $780,000, net
of a $520,000 tax benefit, for write-off of deferred financing and unamortized
issue discounts pertaining to the retired debt.
F-17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY.THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDIC-
TION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
PAGE
----
Available Information.................................................... i
Summary.................................................................. 1
Risk Factors............................................................. 14
Use of Proceeds.......................................................... 20
Capitalization........................................................... 21
Selected Financial and Operating Data.................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 28
Management............................................................... 37
Certain Relationships and Related Transactions........................... 40
Principal Shareholders................................................... 42
Description of Other Indebtedness........................................ 44
Exchange Offer........................................................... 46
Description of Notes..................................................... 55
Certain Federal Income Tax Considerations ............................... 83
Plan of Distribution..................................................... 84
Legal Matters............................................................ 85
Independent Auditors..................................................... 85
Index to Consolidated Financial Statements............................... F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFER TO EXCHANGE ITS 11 1/4% SENIOR B SENIOR SUBORDINATED NOTES DUE 2008 WHICH
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING 11 1/4% SERIES A SENIOR SUBORDINATED NOTES DUE 2008
---------------
PROSPECTUS
---------------
[ ], 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company and Midway-CTS Buffalo Ltd. are both incorporated under the
laws of the State of New York. Section 723 of the New York Business Corporation
Law contains provisions entitling directors and officers of New York
corporations to indemnification from judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, as the result of
an action or proceeding in which they may be included by reason of being or
having been a director or officer of a New York corporation, provided said
officers or directors acted in good faith.
The Company also maintains directors' and officers' liability insurance
covering certain liabilities that may be incurred by directors and officers of
the Company in the performance of their duties.
Clean Towel Service, Inc. and Blue Ridge Textile Manufacturing, Inc. are
both incorporated under the laws of the State of Georgia. The Bylaws of Clean
Towel Service, Inc., a copy of which are filed as Exhibit 3.6, provide for
mandatory indemnification of directors, officers and other persons in certain
circumstances. Generally, the Georgia Business Corporation Code provides that a
corporation may indemnify an individual who is a party to a proceeding because
he or she is or was a director against liability incurred in the proceeding if:
(1) such individual conducted himself or herself in good faith; and (2) such
individual reasonably believed: (A) in the case of conduct in his or her
official capacity, that such conduct was at least not opposed to the best
interests of the corporation; (B) in all other cases, that such conduct was at
least not opposed to the best interests of the corporation; and (C) in the case
of any criminal proceeding, that the individual had no reasonable cause to
believe such conduct was unlawful. Similar indemnification is available for
officers of the corporation.
Ohio Garment Rental Inc. is incorporated under the laws of the State of
Ohio. The Bylaws of Ohio Garment Rental, Inc., a copy of which are filed as
Exhibit 3.8, provide for the mandatory indemnification of directors, officers
and other persons in certain circumstances. Generally, under the Ohio General
Corporation Law, a corporation may indemnify or agree to indemnify any person
who was or is a party, or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture, trust, or other
enterprise, against expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding, if he acted in good faith and in manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, if he has no
reasonable cause to believe his conduct was unlawful. In addition, a corporation
may indemnify or agree to indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgement in its
favor, by reason of the fact that he is or was a director, officer, employee, or
agent of the corporation, or is or was serving at the request of the corporation
as a director, trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited liability
company, or a partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, actually and reasonable incurred by him in
connection with the defense or settlement of such action or suit, if he acted in
good faith and in a manner he reasonable believed to be in or not opposed to the
best interests of the corporation, except that no indemnification shall be made
in respect of certain circumstances.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Company
3.2 Amended and Restated Bylaws of the Company
3.3 Articles of Incorporation of Blue Ridge Textile
Manufacturing, Inc.
3.4 Bylaws of Blue Ridge Textile Manufacturing, Inc.
3.5 Articles of Incorporation of Clean Towel Service, Inc.
3.6 Bylaws of Clean Towel Service, Inc.
3.7 Articles of Incorporation of Ohio Garment Rental, Inc.
II-1
3.8 Bylaws of Ohio Garment Rental, Inc.
3.9 Certificate of Incorporation of Midway-CTS Buffalo, Ltd.
3.10 Bylaws of Midway-CTS Buffalo, Ltd.
4.1 Indenture, dated as of June 26, 1998, by and among the
Company, Blue Ridge Textile Manufacturing, Clean Towel
Service, Inc., Ohio Garment Rental, Inc. and Midway-CTS
Buffalo, Ltd., as guarantors and IBJ Schroder Bank & Trust
Company, as trustee
4.2 Form of 11 1/4% Senior Subordinated Note due 2008
5.1 Opinion of Blank Rome Comisky & McCauley LLP
10.1 Amended and Restated Financing Agreement, dated as of June
26, 1998, between the Company, Blue Ridge Textile
Manufacturing, Inc., Clean Towel Service, Inc., Midway-CTS
Buffalo, Ltd., Ohio Garment Rental, Inc., (collectively,
the "Borrowers") and NationsBank, N.A. (the "Lender")
10.2 Revolving Credit Note, dated as of June 26, 1998, between
the Borrowers and the Lender.
10.3 Capital Expenditure Note, dated as of June 26, 1998,
between the Borrowers and the Lender.
10.4 Acquisition Loan Note, dated as of June 26, 1998, between
the Borrowers and the Lender.
10.5 Lease Purchase Agreement, dated as of December 1, 1994,
between the Erie County Industrial Development Agency and
Midway-CTS Buffalo, Ltd.
10.6 Form of the $2,600,000 Industrial Development Revenue Bond
issued by the Erie County Industrial Development Agency.
10.7 Lessee Guaranty Agreement, dated as of December 1, 1994
between Midway-CTS Buffalo, Ltd. and Key Bank of New York.
10.8 Purchase Agreement, dated as of June 23,1998, by and among
the Company, Blue Ridge Textile Manufacturing, Inc., Clean
Towel Service, Inc., Midway-CTS Buffalo, Ltd., Ohio
Garment Rental, Inc., NationsBank Montgomery Securities
LLC and First Union Capital Markets, a division of Wheat
First Securities, Inc.
II-2
10.9 Registration Rights Agreement , dated as of June 26,1998,
by and among the Company, Blue Ridge Textile
Manufacturing, Inc., Clean Towel Service, Inc., Ohio
Garment Rental, Inc., Midway-CTS Buffalo, Inc.,
NationsBank Montgomery Securities LLC and First Union
Capital Markets, a division of Wheat First Securities,
Inc.
10.10 Promissory Note dated September 27, 1994 from J. Stanley
Coyne payable to the Company and related Mortgage Deed
10.11 Indemnification Agreement of J. Stanley Coyne and Guaranty
by the Company.
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges
21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Blank Rome Comisky & McCauley LLP (See
Exhibit 5.1)
24.1 Power of attorney (included on signature page)
*25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Tender Instructions
(b) Financial Statement Schedules
Schedule VIII - Valuation and Qualifying Accounts and Reserves.
- ----------------
* To be filed by amendment
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-3
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement;
notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement:
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally promptly means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Syracuse, New York on July 28, 1998.
COYNE INTERNATIONAL ENTERPRISES CORP.
By: /s/
-----------------------------------------------
Thomas M. Coyne
Chairman of the Board, President and
Chief Executive Officer
Each person whose signature appears below hereby authorizes Thomas M. Coyne
or Donald F. X. Keegan to file one or more Amendments, including Post-Effective
Amendments, to this Registration Statement, which Amendments may make such
changes as Thomas M. Coyne or Donald F. X. Keegan deem appropriate, and each
person whose signature appears below, individually and in each capacity stated
below hereby appoints Thomas M. Coyne or Donald F. X. Keegan as attorney-in-
fact to execute in his name and on his behalf any such Amendments to this
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE Capacity Date
- ------------------------------------- ------------------------------ --------------------------------
/s/
- ----------------------------
Thomas M. Coyne Chairman of the Board, July 28, 1998
President and Chief
Executive Officer
(Principal Executive
Officer)
/s/
- ----------------------------
Donald F. X. Keegan Vice President, Chief
Financial Officer and July 28, 1998
Treasurer (Principal
Financial and Accounting
Officer)
/s/
- ----------------------------
Thomas C. Crowley Director July 28, 1998
- ----------------------------
James W. Maher Director July , 1998
/s/
- ----------------------------
William D. Matthews Director July 28, 1998
/s/
- ----------------------------
Wallace J. McDonald Director July 28, 1998
/s/
- ----------------------------
David P. O'Hara Director and Assistant July 28, 1998
Secretary
/s/
- ----------------------------
Raymond T. Ryan Director July 28, 1998
/s/
- ----------------------------
J. Patrick Barrett Director July 28, 1998
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Syracuse, New York on July 28, 1998.
BLUE RIDGE TEXTILE MANUFACTURING, INC.
By: /s/
----------------------------------------
Thomas M. Coyne
President
Each person whose signature appears below hereby authorizes Thomas M. Coyne
or Donald F. X. Keegan to file one or more Amendments, including Post-Effective
Amendments, to this Registration Statement, which Amendments may make such
changes as Thomas M. Coyne or Donald F. X. Keegan deem appropriate, and each
person whose signature appears below, individually and in each capacity stated
below hereby appoints Thomas M. Coyne or Donald F. X. Keegan as attorney-in-
fact to execute in his name and on his behalf any such Amendments to this
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE Capacity Date
- -------------------------------------------------------------------------------------------------
/s/
- ------------------------------
Thomas M. Coyne President and Director July 28, 1998
(Principal Executive
Officer)
/s/
- ------------------------------
Donald F. X. Keegan Vice President (Principal July 28, 1998
Financial and Accounting
Officer)
/s/
- ------------------------------
David P. O'Hara Director and Assistant July 28, 1998
Secretary
/s/
- ------------------------------
Raymond T. Ryan Director July 28, 1998
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Syracuse, New York on July 28, 1998.
CLEAN TOWEL SERVICE, INC.
By: /s/
-----------------------------------
Thomas M. Coyne
President
Each person whose signature appears below hereby authorizes Thomas M. Coyne
or Donald F. X. Keegan to file one or more Amendments, including Post-Effective
Amendments, to this Registration Statement, which Amendments may make such
changes as Thomas M. Coyne or Donald F. X. Keegan deem appropriate, and each
person whose signature appears below, individually and in each capacity stated
below hereby appoints Thomas M. Coyne or Donald F. X. Keegan as attorney-in-
fact to execute in his name and on his behalf any such Amendments to this
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE Capacity Date
- -------------------------------------------------------------------------------------------------
/s/
- -----------------------------------
Thomas M. Coyne President and Director July 28, 1998
(Principal Executive
Officer)
/s/
- -----------------------------------
Donald F. X. Keegan Vice President (Principal July 28, 1998
Financial and Accounting
Officer)
/s/
- -----------------------------------
David P. O'Hara Director and Assistant July 28, 1998
Secretary
/s/
- -----------------------------------
Raymond T. Ryan Director July 28, 1998
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Syracuse, New York on July 28, 1998.
OHIO GARMENT RENTAL, INC.
By: /s/
-----------------------------------
Thomas M. Coyne
President
Each person whose signature appears below hereby authorizes Thomas M. Coyne
or Donald F. X. Keegan to file one or more Amendments, including Post-Effective
Amendments, to this Registration Statement, which Amendments may make such
changes as Thomas M. Coyne or Donald F. X. Keegan deem appropriate, and each
person whose signature appears below, individually and in each capacity stated
below hereby appoints Thomas M. Coyne or Donald F. X. Keegan as attorney-in-
fact to execute in his name and on his behalf any such Amendments to this
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE Capacity Date
- -------------------------------------------------------------------------------------------------
/s/
- -----------------------------------
Thomas M. Coyne President and Director July 28, 1998
(Principal Executive
Officer)
/s/
- -----------------------------------
Donald F. X. Keegan Vice President (Principal July 28, 1998
Financial and Accounting
Officer)
/s/
- -----------------------------------
David P. O'Hara Director and Assistant July 28, 1998
Secretary
/s/
- -----------------------------------
Raymond T. Ryan Director July 28, 1998
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Syracuse, New York on July 28, 1998.
MIDWAY-CTS BUFFALO, LTD.
By: /s/
-----------------------------------
Thomas M. Coyne
President
Each person whose signature appears below hereby authorizes Thomas M. Coyne
or Donald F. X. Keegan to file one or more Amendments, including Post-Effective
Amendments, to this Registration Statement, which Amendments may make such
changes as Thomas M. Coyne or Donald F. X. Keegan deem appropriate, and each
person whose signature appears below, individually and in each capacity stated
below hereby appoints Thomas M. Coyne or Donald F. X. Keegan as attorney-in-
fact to execute in his name and on his behalf any such Amendments to this
Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE Capacity Date
- -------------------------------------------------------------------------------------------------
/s/
- ----------------------------------
Thomas M. Coyne President and Director July 28, 1998
(Principal Executive
Officer)
/s/
- ----------------------------------
Donald F. X. Keegan Vice President (Principal July 28, 1998
Financial and Accounting
Officer)
/s/
- ----------------------------------
David P. O'Hara Director and Assistant July 28, 1998
Secretary
/s/
- ----------------------------------
Raymond T. Ryan Director July 28, 1998
II-9